Interbank market news scan: BIS releases paper on virtual banking; forex rates of interest to Atlanta; Ethereum strengthens slightly

Bank of International Settlements. Today, the Bank of International Settlements released a paper on virtual banking providing insights on the use of information capital as a substitute for tangible capital. The paper argues that information capital, comprised of an enterprise’s or individual’s digital data footprint, can be used as collateral for obtaining credit, thus increasing access to credit by small and medium businesses and low income individuals.

While the paper uses the Hong Kong market as a case study, I believe that if US-based banks and fintechs embarked on the same initiative, the following legal issues may arise. Can information capital be used as collateral when borrowing for the purpose of purchasing foreign currencies? Does the use of information capital raise discrimination issues where biases are embeded in the artificial intelligence programming? Are existing laws sufficient for protecting enterprise or individual data privacy where such data is encompassed in information capital used as collateral?

The link to the BIS paper can be found here.

Federal Reserve Bank of New York. Yesterday after the Board of Governors of the Federal Reserve announced that it would hold its interbank rate for overnight lending between 0 and .25%, the Federal Reserve Bank of New York announced that the reserve bank’s Open Market Trading Desk would increase its System Open Market Account holding of Treasury securities by at least $20 billion per month and its agency mortgage-backed securities by at least $10 billion per month. This reduced level of purchasing (down from a combined high of $120 billion per month at the beginning of the pandemic) will commence on 14 February 2022.

The link to the New York Fed’s announcement can be found here.

Interbank Market, Pakistan. The rupee held steady against the dollar at Rs176.98 but has been depreciating in value since 1 July 2021. See link to article here.

Foreign exchange rates as of 10:00 am EDT

EUR/USD=1.1282

GBP/USD=1.3500

USD/MXN=20.6258

USD/GTQ=7.5060

USD/NGN=414.7010

USD/GHS=6.1790

USD/VND=22,632.2000

USD/JPY=114.1900

USD/INR=74.8041

USD/BTC=0.00003

USD/ETH=0.00039

Source: OANDA

Foreign exchange rates of interest …

USD-DXY=96.30

The US dollar index strengthened today versus its 2 January 2022 reading. On 4 January 2022, the USD-DXY was at 96.30, up from a reading of 95.73 on 2 January 2022.

USD-MXN=20.5131

The Mexican peso continued its strengthening against the US dollar. On 4 January 2022, the USD-MXN registered at 20.5131, down from the 2 January 2022 level of 20.7538.

USD-INR=74.2541

And like the peso, the Indian rupee also showed some strength over the prior two-day period. The USD-INR printed at 74.2541, down from the 2 January 2022 level of 75.5300.

USD-VND=22,830.2

The Vietnamese dong appeared flat over the 2-day period coming in today at USD-VND=22,830.2 versus the 2 January 2022 exchange rate of 22,838.

USD-NGN=410.627

Finally, Nigeria does not want to be left out of the strengthening game. Today the USD-NGN came in at 410.627, down from 411.450 on 2 January 2022.

Source: OANDA

Alton Drew

4.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Interbank market news scan as of 3:32 pm AST: Peso, Indian rupee, and Japanese yen weaken against the dollar

Currency pairsExchange Rate Before Event 1:00pm ASTEventPost EventExchange Rate Post Event
AUD/USD0.7666Federal Reserve announcement0.7681Dollar weakens vs AUD
USD/CAD1.2774Federal Reserve announcement1.2759Canadian dollar strengthens vs US dollar
USD/CNY6.4822Federal Reserve announcement6.4822No change
EUR/USD1.2075Federal Reserve announcement1.2118Dollar weakens vs the euro
USD/INR73.0065Federal Reserve announcement73.0500Indian rupee continues weakness vs US dollar
GBP/USD1.3689Federal Reserve announcement1.3715US dollar weakens vs British pound
USD/JPY104.0000Federal Reserve announcement104.0600Japanese yen showing weakness vs US dollar
USD/MXN20.1832Federal Reserve announcement20.7000Mexican peso weakens against US dollar
USD/DKK6.1554Federal Reserve announcement6.1554No change
USD/NOK8.6452Federal Reserve announcement8.6242Norwegian Krona strengthens vs US dollar
Sources: Federal Reserve, Reuters

Today, Jerome Powell, chairman of the Board of Governors of the Federal Reserve issued the following statement:

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Strategic takeaways:

  1. Traders should take a strategic position in the flow of Federal Reserve decision making on rates with the expectation of continued dollar weakness for some time as the Federal Reserve maintains its flexible average inflation rate policy for the net one to two years.
  2. The Federal Reserve may be growing weary of noting the need for fiscal action on the part of the U.S. Congress or sees no need for making such calls given the gravity of the virus and a Democratic-controlled White House and Congress that appear intent on providing another fiscal injection into the economy.
  3. Traders should expect Congress to authorize additional borrowing to finance additional stimulus. Additional fiscal demand may come at a higher interest rate price for taxpayers. Depending on how government structures the stimulus spending, monies directed to infrastructure and the ensuing contracts entered into to bring about infrastructure spending may attract additional domestic and foreign capital.
  4. The Mexican peso, Indian rupee, and Japanese yen weakened after the announcement. The dollar continued its weakness in its more popular currency pairs: the EUR/USD and the GBP/USD. The Chinese yuan remained unchanged expectedly given the People’s Bank of China’s recent announcement on their currency’s value.