Martin Luther

 

“Avoid those who search for your soul in a moneybag. For when they find a penny in the purse, it is dearer to them than any soul whatsoever.” That’s from Martin Luther in 1517. He was in a mood about rich people trying to buy their way into heaven.

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BOJ Yield Control and Formula

BOJ’s yield curve control could ignite bubbles

Bank bucks global trend by maintaining long-term rates at zero

The Bank of Japan’s headquarters in Tokyo

TOKYO — While the U.S. Federal Reserve’s rate hikes put upward pressure on long-term interest rates around the world, Japan is going against the trend as the Bank of Japan tries to maintain long-term interest rates at nearly zero.

“I wish I could say that the BOJ adopted a new policy in September in anticipation of Donald Trump’s victory,” said a BOJ executive. He seemed pleased with the outcome of the bank’s yield curve control.

Takashi Kamiya, chief economist at T&D Asset Management, said theoretical 10-year Japanese government bond yields would have been around 0.5% if the BOJ had not adopted the yield curve control.

Theoretical yields are based on 10-year U.S. Treasury yields and Japanese and U.S. policy rates. Japan’s theoretical long-term interest rates will rise along with the rise in U.S. long-term interest rates and the widening of the spread between long- and short-term rates.

Theoretical 10-year JGB yields are obtained by the following formula: (0.59 x 10-year U.S. Treasury yields) minus (0.11 x U.S. federal funds rate) plus (0.63 x Japan’s policy rate) minus 0.89.

This formula predicted how actual JGB yields would move, until the BOJ launched the yield curve control in September. The spread between theoretical and actual yields started to widen.

The graph shows that actual government bond yields have remained at around zero despite the fact that theoretical 10-year JGB yields are rising along with the uptick in U.S. Treasury yields.

Upward pressure

The BOJ’s monetary policy becomes more accommodative as the spread between theoretical and actual yields widens. The broader the gap between Japanese and U.S. long-term interest rates gets, the more likely the yen will weaken against the dollar. The BOJ’s monetary easing and the weaker yen have also buoyed Japanese stocks.

The situation in Japan is in stark contrast with China. Unlike in Japan, yields on Chinese government bonds are rising sharply along with those on U.S. Treasurys. The People’s Bank of China, the central bank, does not use yield curve controls, but that is not the sole cause of the rise in the Chinese bond yields.

With private capital flowing out of China, Beijing has no choice but to meet rising demand for foreign currencies by digging into its foreign reserves. Since foreign reserves are held by the PBOC, this means the bank is tightening its monetary policy unintentionally.

If this continues, China will likely be hit by a decline in bond and stock prices as well as a weakening yuan, and this will affect the U.S. and Japan as well. U.S. authorities are likely to strengthen their expectations for Japanese investors’ buying, as China’s purchases of U.S. Treasurys can no longer be expected.

Translating it into monetary policy, the BOJ’s yield curve control is expected to be used as an anchor to stabilize U.S. Treasurys.

That reminds us of the so-called “anchor theory,” which emerged after the global stock market chaos, known as Black Monday, in 1987. The BOJ’s policy to keep interest rates low was later criticized for leading to the expansion of the subsequent bubble economy.

The BOJ’s monetary policy is likely to become even more accommodative, as it will take some more time for the bank to achieve its 2% inflation target. Stock and currency market participants may see signs of bubbles forming, but may not want to miss out on opportunities that present themselves.

SPX500 V VIX

Few words thrown together regards to VIX and SPX500

July top by calculations reported 2855 now 3 months later the new top is 2955.71. SPX averages gained 100 points in 3 months.

SPX for 3 months traveled along its top. and without a meaningful correction. Inside SPX current price is pure noise and it deserves desperately a correction. Current prices are mid range to overbought.

Trade strategy as in July is short only until a correction to at least 2600’s trade. Impossible to long a price at its top.

Vital averages 2818.74, 2775.14, 2634.81, 2625.83, 2495.06 and 2405.44.

Trade targets 2955.71, 2904.21, 2869.13, 2813.70, 2742.65, 2681.77, 2646.07

 

VIX

The VIX is a true safe haven asset exactly as  Gold and Silver. SPX is a risk asset while VIX safe haven status trades prices direct opposite to SPX. The ViX correlation currently runs positive 12% and +31% then correlations begin to run higher positives along higher averages. VIX contains an off sync alignment problem to SPX and its related to the SPX top. The higher SPX travels then the more dysfunctional becomes VIX.

Proper VIX status as a correct trade instrument is negative correlations to SPX. A higher VIX means lower SPX while lower VIX translates to higher SPX.

Current averages 17.16, 16.17, 15.65, 15.41, 14.91 and 14.60

Trade Targets 20.31, 19.59, 19.31, 19.59, 18.37, 18.25, 16.57. Trade targets reveal 17.16 holds.

Further VIX explanation to SPX misalignment is VIX best range is 4 points. The lost component to VIX relationship to SPX experienced compression to its averages and therefore lost ranges.

 

Brian Twomey

 

EUR/SEK, EUR/NOK, USD/CAD, CAD/JPY, USD/PLN, EUR/USD

A trade target in any financial instrument represents a point of alignment to a distribution, an average. A target is a settled price, a comfort point, a location that must achieve its destination by mathematical standards. A price lacks any other choice except to align and reach its price target.

W trade on the assumption the market is correct when in reality, the market is always wrong and this is what allows for off kilter prices to trade to a target. If the market was always correct, trading wouldn’t exist. The key is to know which market price, currency pair or what financial instrument offers the best trade profit.

A settled price or price inside a specific comfort zone lacks a meaningful trade because its price is correct. A correct market price must allow time to travel to its off sync destination before a trade is worthy. This takes time especially in today’s non volatile markets. The key is to find the most non correct price in order to trade an easy price target.

A trader married to a particular currency pair or financial instrument must view prices as off base to alignment then off base back to alignment. If an off sync price achieves alignment then naturally it must travel to off kilter again. This means for example , long and short is identified by long alignment and short off kilter.

USD/CAD and CAD/JPY offer such multiple trades this week

For the week, here’s a few trades

EUR/USD watch break 1.1054 then 1.1160, 1.1266 and a massive brick wall at 1.1307 and 1.1337.

EUR/SEK

For the week, big line break 10.6975, below targets 10.6670 and 10.6362. Long term target 10.1092

Strategy. Short 10.8083 and 10.8142, to target 10.7588. Must cross 10.8083, 10.8007, 10.7854. Short only strategy.
Short entry just before 10.8201.

EUR/NOK

Break Point 9.8854, below targets 9.8472 and 9.8090. Longer term target 9.4172.

Strategy. Short 9.9904 and 10.0000 to target 9.9618. Must cross 9.9809, 9.9713 and 9.9663. Short only strategy.

Shorts just before 10.0382

USDCAD. Break Point 1.3267, below targets 1.3186, 1.3161 and 1.3149

Strategy. Short 1.3321 and 1.3348 if seen to target 1.3270. Must cross 1.3294. Short below 1.3267 to target 1.3186. Must cross 1.3240 and 1.3213. Long 1.3186 to target 1.3253. Must cross 1.3213 and 1.3240. Short only strategy.

CADJPY. Break Point 81.29, above targets 81.76, 82.15 and 82.58.

Strategy. Long 80.41 and 80.20 if seen to target 81.20. Must cross 80.41, 80.85 and 81.02. Long above 81.29 to target 82.36. Must cross 81.72 and 82.15. Short 82.36 to target 81.50. Must cross 82.15 and 8172. Long only strategy.

USD/PLN

Break Point 3.9251, below targets 3.8943 and 3.8635. Longer term target 3.7381.

Strategy. Short 3.9559 and 3.9713 to target 3.9328. Must cross 3.9559, 3.9405. Short only strategy.

Shorts just before 3.9867. Watch break 3.9251 and take this short immediately.

Brian Twomey

Peter Wadkins EUR/USD close to over sold territory, fundamentals favour fading rallies

EUR/USD close to over sold territory, fundamentals favour fading rallies

Peter Wadkins

Status is online

Peter Wadkins

Founder at InvictusFX
4 articles 

At time of our original analysis (September 16th) EUR/USD closed at 1.1028, off 1.9% since April 5th. In historical context for that period, it was pretty tame (the third least volatile period since the inception of the Euro) and less than half the average 5.1% fluctuation for that period .

Reviewing the 20 summers since the Euro was launched it’s surprising that 9 out of 20 saw EUR/USD decline, surprising because tourist inflows have always bolstered the current accounts of legacy currency countries, particularly Italy, Spain and Greece. During our European sojourn it was patently obvious that tourism continues to be the mainstay of the Southern European economies.

The average of EUR/USD declines during the periods under review were 6.7% and the rallies 5.4%. Adjusted for outliers (highest and lowest) those fluctuations average 6.0% and 5.1% respectively. The 2019 spring/summer decline (referring to our selected dates – April 5 / September 16) of 1.9% was the smallest of any decline since the Euro was launched. The 1.1403/1.0926 Hi/Lo was a mere 4.4% fluctuation and reflects the generally subdued mood in major FX pairs during the summer of 2019. It should be noted however that the September low was the lowest EUR/USD has registered since May 2017, which hints at further downside probes.

Our fair value Bollinger Band / moving average model that monitors 15 components from the 24-Hr M/A to the 200 DMA updated yesterday, reveals EUR/USD is just 0.6% above the -2.5% blended model Bollinger Band midpoint. This is due to the longer term valuations being stretched. The upper band of the blended oversold model is located at 1.0971 and the lower band 1.0896,

The intermediate components would allow EUR/USD to dip to 1.0889 and the medium term components 1.0856. The lowest -3.0 Bollinger Band reading we use resides at 1.0828 (75-DMA).

The implication from all this is that EUR/USD at 1.0998 is about 1.6% above it’s lowest attainable level and starts becoming oversold as high as 1.0978, which is why it has struggled around to break significantly below 1.1000. 1.0860-1.0945 registers heavily oversold for various averages between the 24-HMA and the 200-DMA, consequently algos that incorporate similar types of value indicators will be reducing short positions as they near those parameters.

Bollinger Band Moving Average Mode

Short term M/As will be the first to get stretched, 1.0845 represents a -4.1% Bollinger band reading and whilst attainable (we pressed -4.5 on Sep 18 at 1.1013) would likely be short-lived and prompt profit-taking. The recent high was 1.1073 on Sep 19, so if we press as low as 1.0845 look to scale out of shorts and reload higher up.

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The beautiful feature of Bollinger Bands is they expand and contract with volatility, so as of today a -4.5 reading on the 24-HMA would be 1.0873. This feature helps you avoid scaling out too early from positions or, more importantly, entering a counter-trend trade too early if you’re a value seeker looking to catch the proverbial falling knife.

The recommended setting for Bollinger Bands is -2.0 BUT through trial and and with different instruments we’ve found it better to experiment with that. Over time I’ve found the 24-HMA setting should be higher, +/- 2.5 for overbought/ oversold and +/- 3.5 for overbought/ oversold however once you get out to 72-hrs it;s better to revert to +/- 2.0 and 3.0. For convenience sake you can look at the mid , 3.0 for short term and 2.5 for longer term BUT when markets are less volatile or the trends are muted you can miss trades by having your markers too high or low.

As an example, when we hit the 1.0926 low the 24-HMA Bollinger Band reading was just -2.2 which is why you have to also monitor the longer term readings. When we hit that low the 200-HMA Bollinger Band was at -2.6 and had broken through the -3.0 level about a day earlier – a warning signal that we were approaching heavily oversold levels. The 21-DMA Bollinger Band registered -2.6 at the 1.0926 low and as the bands contracted, registered a -2.9 reading 7 days later at 1.09265, which formed a double bottom, a second bite at the cherry and a clear warning a bounce was coming.

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Evidence that the EUR/USD market is in a state of flux can also be found on mixed candlestick formations over the past 3 weeks, a bullish firefly, followed by a bearish gravestone doji, a bullish engulfing candle, followed by a bearish hammer. Every one of those signals if followed would have netted a decent profit if acted upon and since then we’ve experienced sideways action with a negative bias.

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Technically, our moving average/ Bollinger Band model once more shifted maximum short which is its maximum short and is at its most vulnerable. Remember, oversold valuations start registering from 1.0978 to 1.0942 for the ultra short term M/As out to the medium term M/As, so trailing stops and oversold targets are probably the way to go.

FUNDAMENTALS

This section we compiled Friday after stocks flirted with the year’s highs, the Dow closed down 0.59%, the S&P closed down 0.49% and the Nasdaq 0.8% on triple-witching day. The Fed announced it will maintain its daily repo operations until October 10th, easing recent quarter end USD funding concerns but Fed Chair Powell’s post- FOMC comments still hang in the air, the Fed’s easing stance can no longer be taken for granted.

The shortage of reserves in the US banking system will hang over the market throughout Q4 into the New Year and will make overseas participants in US money markets wary of their balance sheet status. That should buoy short term US interest rates and underpin the US dollar, however looking at the DXY and the April 5 and September 16 2019 dates we reviewed in the Technicals part of this paper the DXY has only advanced 1.3%, which tells us that Euro weakness has also contributed to the single currency’s decline.

Despite the Fed clipping 0.25% off the Fed Funds target rate to this week (now 1.75-2.0%) vs the ECB moving rates 0.1% more negative (to -0.5%) EUR/USD has remained under pressure which seems more related to Fed Chair Powell’s enigmatic remarks as well as the obvious dichotomy between different camps on the FOMC.

Whilst most pundits expect the ECB to maintain rates at current levels for the next 12 months, Fed watchers are also split, whilst markets are still pricing in a roughly 45% chance of an October rate cut, it seems unlikely given the internal schism apparent after Wednesday’s press conference. The meeting’s minutes will be strongly scrutinized for more clues in 3 weeks time which should tell us how data dependent Fed policy is. Most market participants concur that the biggest risk on the horizon is that US economic data picks up and derails further interest rate cuts.

There’s widespread talk of a recession in Germany which was reflected in the last Ifo index on August 26 that was dismal. A recent Economist Magazine report attributed the economic slump to the export sector, primarily car exports that have slumped due to poor demand in China and the UK. Car production is off 17% this year according to the Economist which also notes a drop in demand for Germany’s predominantly diesel fueled motor vehicles.

The bigger issue with Germany is its massive current account surplus, in 2018 it was the world’s largest at USD 294 bln representing 7.4% of GDP, down from 2015’s 8.9% but still way above the European Commission’s upper bound of 6.0%. Given the EU area’s GDP surplus is a tad below 3% it’s patently obvious that Germany’s out-performance is robbing economic vibrancy from fellow EU members, particularly those currently in the Euro Zone.

In the past the less productive economies would devalue their currencies to offset Germany’s efficiency gains, without that ability Germany’s economy will continue to outpace fellow EU member countries and the economic imbalances will continue to compound. A more egregious current account surplus offender in percentage terms is the Netherlands at roughly 9% but due to Germany’s larger population, it is Germany’s current account surplus that draws the attention.

The US current account deficit last year was USD 488.5 bln or 2.4% of GDP, it’s unhealthy to continue to amass these sizable deficits which is why the US Administration is fighting to redress trade imbalances after decades of deterioration. Wealth transference between the G7 and the rest of the world has continued unabated for decades but it’s only the primary G7 C/A deficit nations that suffer at the margin.

Global central banks, still recovering from the Great Financial Crisis remain handcuffed in their ability to accelerate global growth the RBNZ held rates unchanged this week after no changes from the BoC, BoE, BoJ, RBA and the SNB. The 25bp rate cut by the Fed and further 0.1% increase in the ECB’s base rate paints a grim picture as to next steps. The pundits believe the negative US yield curve forecasts that a US recession is on the cards but US economic data does not support that theory.

Whilst the US ISM dipped into mildly negative territory (49.1) it was the August report and that’s when factories shut down and retool. Depending upon the vagaries of those developments (Did they extend the furlough? Did the dates straddle different weeks because of calendar effects? etc) it’s not a good month to base decisions on.

US industrial production was +0.6%, decent; retail sales +0.4%, OK; durable goods +2.1%, nice headline; housing starts +12.3%, outstanding; housing sales +1.3%, good; and house prices are up on the year. Add to that average hourly earnings are up 3.2% despite a softer set of NFP data than forecast, plus downward revisions and you have to say things are OK. not great but OK.

On balance it appears the Fed’s actions for once have been to head off potential headwinds to the economy. With unemployment at a historically low 3.7% it surprises me that we’ve had consecutive rate cuts but we have. Those cuts were insurance cuts, ’cause nobody wants a recession, you can always hike if the inflation rate accelerates but with negative interest rates in most of the developed world what’s going to ramp up inflation?

The biggest potential black swan event is likely to emanate from the continuing trade tariff discussions between the US and China (mainly) and the EU behind that, but these discussions are needed to redress negative trade conditions that have prevailed for decades, with China and Germany the largest global export rivals and both of their trade surpluses, the Administration will continue to fight the fight.

The fact of the matter is the US sucks in the most imports, in a tit-for-tat war on trade tariffs, the US has to win. Sure the US consumer may have to pay a little more for consumer goods but it could also have a positive impact domestically, US consumers may buy more American products as foreign price advantage is diminished by tariffs; but maybe they’ll decide at the higher price it’s not worth having. Either way the US capital accounts will eventually benefit.

For additional content please see InvictusFX.com

10 year yield V FX, Stocks, Commodities, DXY

The 10 year Treasury yield on September 3rd was 1.43, stalled September 8 -10th then resumed the uptrend to close at 1.899 on September 13. The yield rose 46 points.

Yield aside, the 10 year bond price September 3rd reached 99.00 dropped to September 13 at 97.6/ 32 as Treasuries are priced in 32nds as opposed to foreign bonds at 0.01.

To recap, 99.00 Bond price Vs 1.43 yield.

DXY September 3 – 13 dropped from 99.37 – 97.87 or 150 pips. The 10 year yield rose and DXY dropped. No such concept exists to 100 DXY. The bond price and DXY are at highest points while yields at bottoms.

Currencies Sept 3 -13

21 of 28 currencies rose and 7 currency pairs dropped as follows
EURAUD
EURGBP
USDCAD
GBPAUD
GBPNZD
EURNZD
EURCAD

Stock Markets, All risk assets rose as follows

FTSE DAX S&P, Nikkei, ASX SPTSX

The VIX was down

Bond Prices Sept 3 -13

JGB’s = Down Gilts = Down Bunds = Down Treasuries = Down

Commodities Sept 3 -13

WTI Up, yet Skitzy prices while Brent = Up. As an aside, WTI since January had a 5 Point range in every month since January. WTI lacks a serious Correlation to not only GDP but all USD financial assets.

Nat Gas UP

Gold Down deeply

Silver Down deeply

wheat UP
Copper UP

Soybeans UP

To define the 10 year Bond price

Bond price Current 97. 6/32

Maturity Aug 2029

Coupon Rate 1.62

Yield to Maturity 34.13% means price expected if held to 10 year maturity.

To understand 32nds

30 year Treasury yield is priced in 32nds and priced at $312.50 for each 32nd or $3,000 per point. One basis point on a 10 year bond is $1000.
A guide
From fraction to decimal,
1/32 = 0.0313,
3/64 = 0.0469,
1/16 = 0.0625,
5/64 = 0.0781.
At 63/64 = 0.9844 then comes 1.0 as a fully traded basis point.
From Fraction to percent,
1/32 = 3.125%
3/64 = 4.687%
1/16 = 6.25%
5/64 = 7.812
63/64 = 98.437%. Then 1.0 as a fully traded basis point.

What is safehaven and Safehaven assets and how is it defined Answer is any asset that is or follows a bond price because of the guaranteed obligation placed on bond payouts by governments. Gold and Silver past and present falls into safe assets.

DXY is safe while USD as general concept as USDJPY USDCHF USDCAD Fails definition. Yet USDCAD is a severe outlier Currency.

Yield curve maybe defined by actual yields but a true yield curve is interest rates because interest rates price yields and bonds. Actually, Yields and bonds are secondary financial instruments.

 

Brian Twomey

EONIA Switch to ESTR

ECB will begin elimination of Eonia and replaced with $STR. on October 2
Massive change is the 3:00 a.m EST publication time from Afternoon EST in New York afternoon.
No longer will Eonia compete against FED Funds Rate released at 4:15 EST daily and published just shortly after Eonia.
Now $STR becomes its own standing Interest rate and competes against itself and other European interest rates.
This move, years in the overall ECB plan, represents the ECB full break with Fed Funds.
More importantly, the new plan represents the ECB‘s full control over EUR and all European Financial instruments as is the Methodology for all nations. European interest rates now fully decide their own price of their financial instruments to include Euro. Previous in NY afternoons, Eonia competed with Fed Funds as traders had a choice to trade USD or Eonia.
Its a smart move for the ECB.
 The 3 am publication means $STR moves ahead of the BOE  Sonia so EUR becomes King Currency as the first trade Currency over GBP.
Overall Trade lineup from FED funds 4:15 EST. As follows
3 am means americans daytrades are forced to trade as we do starting at 2:30 am or the day trade profits will be lost.
New $STR means EUR may predict 24 hours ahead accurately as is the case for all currencies. Previously, Eonia released in NY afternoons had to compete with not only Fed Funds but the next day’s Euribor release. Eonia was to involved against other interest rates to predict 24 hours ahead with perfect accuracy.
 EUR movements should be better, more sound. Forward STR will be calculated based on OIS trade rates
  The ECB’s transition to STR means no changes to overall Interest rates. The idea to go more negative interest rates forces CHF, SEK, DKK and NOK to cut their own rates lower as all interest rates from respective nations are located below Europe. Now is not the time for the ECB to act while in transition.
      Brian Twomey

FX Yearly Currency Price Cycles and Budgets

USD and yearly Currency Price cycles is explained by monthly Government budgets, predicated by Unitedstates

USD Oct

EUR Nov

GBP Feb/ March

CHF Feb

CAD March

JPY April

NZD May /June

AUD June / July

How Government budgets relates to Currency Futures is due to Futures trade based on money Supplies and explains why volume in Contract numbers are crucial to futures trading and relates directly to currency spot prices..

An overbought futures price occurs when price exceeded money Supply, while oversold or low price means a low money Supply.

Contango and Backwardation hardly explains prices fully.

Explains why volume is the first and oldest indicator coupled with its next oldest rival open Interest.

Futures contracts then and now trade as open interest is the Trade Signal while Volume is hedged.

Yet volume alone to money Supply is enough information for a trade.

Seen Normally as budget cycles is a Currency Price, Jpy for example, drops every April to allow Government to fund the budget., happened 14 times since 1995, except for weird markets years, 2019, 18, 2013, 2010, 2008, 2007, 2003, 1998, 1997. Yet up months contained small moves.

My trusted friend, http://tantalumwatches.com  exquisite top brand name Watches, #watches, Pocket Watches, Rings, luxurious, please have a look, Brian Twomey

 

Brian Twomey

Trump, Trade and 1977 International Emergency Economic Powers Act

International Emergency Economic Powers Act 1977

Below is a brief synopsis to a March 2019 Congressional Research Service 68 page report to answer by historical standards and to highlight the question to Economic Emergency and Presidential authority. Offered for educational purposes to synthesize factual context. Must stress, below derives not from original research.

The IEEPA contains a long and varied history since Woodrow Wilson from its WW 1 and 1916 /1917 derivation: Trading with the Enemy Act. The original purpose to Trading with the Enemy Act was an answer to Europe’s Executive Department regulation of economics and trade “with or without the support of respective legislatures.

Between 1916 -1917, Congress passed 22 laws granting President Wilson authority to seize control of United States private or foreign property for public use during the war. Private property was defined then as any property from Rail, Cars, Water, phones. Further laws granted Executive authority to Presidents over International Trade, Migration, investment, communication between enemies, FX, Gold and Silver, credit transfers.

Section 5 b under Trading with the Enemy Act was and lives today as crucial due to its grant of Presidents total Emergency Economic powers. The only difference today is 1970’s restrictions placed on 5b Emergencies over the decades to include Emergency timelines, cost, frequent reports, continued emergency declarations, nations, individuals and terrorist or enemy group targets.

Trading with the Enemy Act terminated in 1921 after WW 1 but revived by use of 5b under President Roosevelt in the 1930’s to include for all Western nations its new format: Presidential Emergency Powers during peacetime. Under 5b’s new format included during war and any national economic emergency declared by the president. Under any economic emergency, Roosevelt completely revived Wilson’s 5b powers to Trading with the Enemy Act.

Under 5b, Roosevelt declared a 4 day bank holiday to suspend all bank transactions to include regulation of foreign exchange, regulate bank credit transfers, seize private property, Gold, Silver and precious metals.

President Truman in the 1950’s began 5b Economic Emergencies to target nations: China and North Korea while the 1970’s began declared Economic Emergencies under newly passed Export Control laws as well as target Communist nations during the Cold War. One mainstay from Wilson to the 1977 International Emergency Economic Powers act of 1977 is declaration to the hoarding of Gold.

Related to Trump today is Lyndon Johnson’s 1968 Emergency declaration under 5b powers to limit Direct Foreign Investment by US companies to strengthen the Balance of Payment position of the United States.” Nixon then placed a 10% Tax on imports entering the United States at the same time the Gold Standard was lifted in favor of the FX free float.

By the 1970’s first review of Economic Emergencies and 5b, the United Stated declared 470 Emergencies without time limitations. Then began the revelation to declaration of Economic Emergencies to a dictator or a president who sought autocratic power due to the broad powers granted under Economic Emergencies without Congressional control.
Reforms began with passage of the National Emergencies Act of 1976 to eliminate past emergencies and 5b remained. A President must now inform Congress to Economic Emergencies and under a twice yearly review, Congress by vote may eliminate the Economic Emergency.

5b Provisons were not reformed in a true sense under the 1977 International Emergency Economic Powers Act except a President must inform Congress, submit reports, highlight exact Emergency or threat, provisions for foreign nations, individuals or groups blocked, frozen or seized assets. Economic Emergencies to Commerce was expanded under 5b since the Trading with the Enemy Act to include sanctions. A total of 54 Economic Emergencies were declared since 1977 and 32 remain ongoing today against an average duration of 10 years.

Domestically, Hurricanes are always declared Economic Emergencies, the 9/11 Terrorist attacks and Trump’s Immigration on the Southern Border Southern dilemma. The Iranian hostage crisis of 1979 remains the longest ongoing Economic Emergency.

Economic Emergencies under 5b expanded to include chemical and biological weapons, cyber attacks, religious persecution. Broad powers were expanded under 5b Transaction to include target individuals, groups, and provisions for law violations.

In Trade as past precedents to Trump’s China tariffs, Nicaragua and South Africa were restricted from Trade with the United States in the 1980’s, Trump targeted Venezuela’s Oil company Petro of Venezuela as well as many individuals related to trade.

Overall, as 5b Emergency Economic threats became apparent to national security, 5b provisions under the 1977 act expanded. Trump China Tariffs and Trade restriction contain every legality under 5b and the 1977 International Emergency Economic Powers Act.

 

Brian Twomey

DXY, Yields, Interest Rates, GDP

1 Year Yield as % =1.7170  Interest Rate =2.7170

2 Year Yield as % =1.4860 Interest Rate 2.4860

3 Year Yield as % =1.4380 Interest Rate 2.4380

5 Year Yield as % =1.4230 Interest Rate 2.4230

7 Year Yield as % =1.4970 Interest Rate 2.4970

10 Year Yield as % = 1.5620 Interest Rate 2.5620

20 Year Yield as % 1.82 Interest Rate 2.82

 

Commercial Paper as % = 2.03 Interest Rate 3.03

GDP as % = 2.1 Interest Rate 3.1

CPI Annual as % =1.81 Interest Rate 2.81

CPI Quarter as % =0.3 Interest Rate 1.3

 

30 Year Yield as % =2.044 Interest Rate 3.044

DXY 98.20

Fed Funds Effective as % = 2.13 Interest Rate 3.13

Headline as % =2.25 Interest Rate 3.25.

Commercial Paper as % = 2.05 Interest Rate 3.05

Commercial Paper as % = 2.08 Interest Rate 3.08

GDP as % = 2.1 Interest Rate 3.1

Absolutely Powell Raised  rates to high and to quickly and as the end result was a severely misaligned yield curve. All Fed interest rates and GDP trade above the 30 year yield while Europe and the EUR trade between the 20 and 30 year yield.

Both Europe and USD suffer from severe mis alignments. Proper for USD is Fed interest rates below yields and for Europe, ECB interest rates above yields. Between FED and ECB interest rates and yields, convergence trades. Not sure ECB easing makes any sense due to yield and interest rate positions. Easing drops interest rates further yet ECB money supplies were always on the rise since 2008 in the current 12 billion vicinity and I always assumed the ECB goal was to not allow money supplies to deviate far from USD in order to hold the EUR at an acceptable exchange rate Vs USD.

Yet Eonia 0.636 V 2.13 Fed funds allows for a 1.49 spread. This spread must break wider.

For Fed Cuts, Trump is right, Powell must ease while the ECB must tighten, not ease to rightsize both systems. And especially now as GDP is in good shape as mentioned months ago from GDP long term averages. CPI below GDP as well is correctly aligned.

 

Brian Twomey

 

EUR/USD, Yields V Interest Rates

This post information is in extreme early development stages.

German Yields and Interest Rates Vs EUR and ECB Interest Rates

1 year Yields as % =-0.843 = Interest Rate 0.157

2 Year Yield as % =-0.906 = Interest Rate 0.094

3 Year Yield as % = -0.9516 = Interest Rate 0.0484

4 Year Yield as % =-0.9537 = Interest Rate 0.0463

5 Year Yield as % =-0.9257 = Interest Rate 0.0743

6 Year Yield as % =-0.899 = Interest Rate 0.101

7 Year Yield as % =-0.864 = Interest Rate 0.126

8 Year Yield as % =-0.8026 = Interest Rate 0.1974

9 Year Yield as % =-0.777= Interest Rate 0.223

10 Year Yield as % =-0.688 = Interest Rate 0.312

20 Year Yield as % = -0.4137 = Interest Rate 0.5863

ECB Interest Rates and EUR Trades here

-0.385 % = Interest Rate 0.615

-0.403 % =Interest Rate 0.597

-0.420 % = Interest Rate 0.580

-0.423 % = Interest Rate 0.577

-0.427 % = Interest Rate 0.673.

30 Year Yield as % =-0.224 = Interest Rate 0.776

EUR Trades between 20 and 30 year yields from 0.5863 to 0.7760 or 1897 points  and ECB 0.577 to 0.673 or 96 points but this will tighten in another day.

Brian Twomey

 

Long Term Targets, Deviations and Cycles

One time in any given year, currency prices are sufficiently deviated enough to offer the most easiest, most profitable, most guaranteed market derived trades. The profits earned by this one period will outperform money results by trading an entire year. Why is based on the question to define markets and trading and the action of market prices.

All market prices in all financial instruments travel from deviation to non deviation then back to deviation and non deviation again. Most profitable period to earn easiest money is at the peak of the deviation to trade to non deviation. Once non deviation is achieved, trades are difficult and won’t perform to the profit potential of highest deviations because prices are on the way to deviation again. This means traders can refrain from trading for almost an entire year to wait for the peak deviation period. Think in terms of a winner lottery ticket, a broken ATM machine that ejects money.

Trades past, present and future are defined as a target number and doesn’t require a chart, graph, stop, focus on central bank meeting, economic releases, tariffs. A target price must achieve its destination and it doesn’t have any other choice.

The amount of trades in any year is defined as 7 or 21 to cover 28 currency pairs but the amount depends on what is deviated. Total trades are higher if emerging market currencies are included as a deviated market includes all markets.

Non deviation to deviation is a process and takes 1 year to achieve maximum peak levels.

For the past 3 years, the 2nd quarter and sometimes part 3rd quarter was the time of highest peak levels.

Deviation to answer what is deviated means either USD and Non USD or cross pairs. Each year USD and Non USD take deviated turns to cross pairs. 3 years ago, USD and Non USD was most deviated and this means only 7 USD and Non USD were the trades. Last year, cross pairs were most deviated to USD and Non USD and this means 21 trades became available. This year, USD V Non USD are most deviated. Next year, cross pairs will become the most opportune trades for 21 total trades.

Trade duration to targets usually means as much as 1 quarter, 3 months or 12 weeks. Depends on the currency pair, deviation and time to achieve target.

I’m waiting for the time when USD and Non USD and cross pairs deviate at the same time to maximum peak and this current quarter is under this very question but only as it applies to GBP yet my suspicion is markets would never allow a greater distance than exists today and the past 3 year example.

A non deviated market refers to roughly 150 to 250 pips. This deviation is built into the price system naturally. By speculation, its impossible to achieve less. A non deviated market for the past 3 years travels to maximum peak deviation at roughly 600 pips. From 150 and 250 to 600 defines a fairly normal functioning yearly market. Higher than 600 refers to abnormality. Current year trades at abnormality. Abnormality can only mean the expected correction never arrived as anticipated and prices continued on their wayward path.

When cross pairs are deviated, USD and Non USD trade in tiny ranges while the opposite holds true. When USD and Non is deviated, cross pairs trade in tiny ranges. Markets allow deviations to achieve non deviation status.
The foundation to such price concepts must derive from the current 12 1/2 year economic period and 4th period but also the last quadrant in an overall 50 year time frame. In comparison, currency cycle trends are 9 years, a 3 1/2 year price lag to the economic cycle. The 9 years means mini cycles of 4 at 2.25 years while economic cycles are 4 periods of 3 years. Market prices are laggards to the economic cycles.

GBP pairs are most abnormal followed by AUD, NZD and EUR while USD is fine. AUD, NZD and EUR fall within regular bounds of overall normal functioning markets.

Below are currency pair price targets, normalization point and deviations then deviations to long term targets.

GBP/USD. 1.3600’s target, Normalization 1.2900’s = 900 pip deviation and 1600 pip deviation to target.

GBP/JPY. 147.00’s target, Normalization 136.00’s = 1000 pip deviation and 2100 pip deviation to target.

GBP/CHF. 1.3200’s target , Normalization 1.2400’s = 800 pip deviation and 1500 pip deviation to target.

GBP/CAD Normalization 1.6500’s and 700 pip deviation.

GBP/NZD Normalization 1.8800’s and 300 pip deviation.

GBP/AUD Normalization 1.7900’s and 200 pip deviation.

AUD.

AUD/USD 0.7400’s target, normalization 0.6900’s = 200 pip deviation and 700 pip deviation to target.

AUD/CHF 0.7375 target, Normalization 0.6800’s = 300 pip deviation and 800 pip deviation to target.

AUD/JPY 80.00 target, Normalization 74.00’s = 300 pip deviation and 900 pip deviation to target.

NZD

NZD/USD. 0.6800’s target, Normalization 0.6600’s = 200 pip deviation and 400 pip deviation to target.

NZD/CHF 0.6800 target, Normalization 0.6500’s = 300 pip deviation and 600 pip deviation to target.

NZD/JPY 72.00 target, Normalization 71.00’s = 300 pip deviation and 400 pip deviation to target.

EUR

EUR/USD 1.1547 target, Normalization 1.1216 = 300 pip deviation to target.

EUR/JPY 124.00’s target Normalization 121.00’s = 300 pip deviation and 600 pip deviation to target.

EUR/AUD. 1.5700’s target Normalization 1.6200’s = 200 pip deviation and 700 pip deviation to target.

EUR/NZD No deviation

EUR/CAD No deviation.

USD

USD/CHF No deviation

USD/JPY no deviation

CHF/JPY no deviation.

USD/CAD. 1.2800’s target, Normalization 1.3200’s = no deviation and 400 pip deviation to target.

CAD/JPY 84.00’s, Normalization 81.00 = 200 pip deviation and 500 pip deviation to target.

 

 

 

USD V 16 EM Currencies: Preliminary Results

  Targets Complete USD/RUB, USD/RON, USD/PLN, USD/TRY, USD/HUF, USD/ILS, USD/CZK, USD/BRL and USD/THB.
USDRUB. Close 65.2713. Overbought. Short target 64.7318 on break 65.0788. Weekly Range 66.1211 -64.7318.
Break 64.0373 Targets 63.3427. Actual Range 65.8806 -64.9656. target almost Complete,
USDRON. Close. 4.2536. Neutral. Short 4.2697 to target 4.2464. Weekly range 4.2930 -4.2464. Break 4.2231 targets 4.1998.
Actual Range 4.2562 -4.2068. Missed short 4.26 but 4.2231 -4.1998 Valid, Trade runs +163 pips
USDPLN. Close 3.8781. Deeply overbought. Short target 3.8431 on break 3.8676. Weekly range 3.8921 -3.8431.
Actual Range 3.8825 -3.8410. Target Complete. +350 pips about
USDMXN. Close 19.3055. Severely overbought. Short target 19.2077 on break 19.2793. Weekly Range 19.3509 -19.2077.
Break 19.1361 targets 19.0645. Actual Range 19.2983 -19.6994, Target not Complete Yet
USDTRY Close 5.5611. Oversold. Good long point 5.5294 to target 5.5719. Weekly range 5.4021 -5.5719.
Break 5.6568 targets 5.7417. Wide range Currency Pair.
Actual Range 5.6171 -5.4787, Target Complete from 5.5294 -5.5719 +425 pips
USDHUF Close 294.6400. Overbought. Short target 293.1945. Bonus short point 296.7659.
Weekly Range 300.3375 -293.1945. Break 289.6230 targets 286.0515.
Actual Range 294.78 -289.55,
Target 293.19 Complete +145 pips
USDMYR Close 4.1575. Deeply overbought. Short target 4.1403 on break 4.1496.
Weekly Range 4.1403 -4.1589. Break 4.1310 targets 4.1217.
Actual Range 4.1973 -4.1561. Bonus Short on severely disjointed prices
USDILS Close 3.4939. Oversold. Long 3.4723 to target 3.5153.
Weekly range 3.4293 -3.5153. Break 3.5583 targets 3.6013.
Actual Range 3.4782 -3.5015, almost at target
USDINR Close 69.7000. Overbought. Short 70.0881 to target 69.6925. Weekly Range 70.4837 -69.6925.
Break 69.2969 targets 68.9013. Actual Range 71.04 -70.10, target not complete Yet
USDCZK Close 23.1790. Short target 23.0156 on break 23.1488.
Weekly Range 23.2820 – 23.0156. Break 22.8824 targets 22.7492.
, Actual Range 23.1881 -22.9461 Watch 22.8824 Target Complete 
USDSGD Close 1.3773. Deeply overbought.
Short target 1.3692 on break 1.3734.
Weekly range 1.3692 -1.3776. Below 1.3650 targets 1.3608.
Actual Range so Far 1.3756 -1.3853. Bonus Shorts
USDBRL Close 3.9800, Deeply overbought. Short target 3.9230 then 3.8590. Must cross 3.8910.
Weekly Range 3.8590 -3.9230. Below 3.8270 targets 3.7950.
Actual Target complete, Weekly range so far 3.9840 -3.8840
USDTHB Close 30.7150. Overbought. Short target 30.4329. Sell point 31.7613. Must cross 31.5971.
Weekly range 32.0897 -31.4329. Break 31.1045 targets 30.7761.
Actual Range so far 31.12 -30.43 or 69 pips on intetestrate cut. Target Complete. 
USDZAR. Close 14.7885. Deeply overbought. Short target 14.5098 then 14.4134.
Break 14.2206 targets 14.1242. Wide range currency pair.
Actual Range 14.9995 -14.7335. target Not complete Yet
USDPHP. Close 51.6500. weekly Range 51.4891 -51.9105.
Break 51.4891 targets 51.0677. No thrills here, Correct.
Actual Range 51.5150 -52.3770.
USDCNY Close 6.9405. Overbought. Weekly range 6.9348 -6.8992. Target 6.8992. Must break 6.9704.
Below 6.8636 targets 6.8280. Target not complete
                  Brian Twomey

Smithsonian Agreement

December 1971

In December 1971, monetary authorities from the world’s leading developed countries gathered in Washington, DC, in an ultimately unsuccessful attempt to rescue the Bretton Woods global monetary system.

21st December 1971: US Treasury Secretary John Connally, right, Chairman of the meeting of the Group of Ten Ministers, chats with Renaldo Ossalo, at a meeting on international financial affairs.

21st December 1971: US Treasury Secretary John Connally, right, Chairman of the meeting of the Group of Ten Ministers, chats with Renaldo Ossalo, at a meeting on international financial affairs. (Consolidated News Pictures/Hulton Archive/Getty Images)


by Owen HumpageOffsite link, Federal Reserve Bank of Cleveland

In December 1971, monetary authorities from the world’s leading developed countries met at the Smithsonian InstitutionOffsite link in Washington, DC. They hoped to rescue an international arrangement that was rapidly disintegrating, the Bretton Woods system of fixed exchange rates. The Smithsonian Agreement is what they came up with, but it proved too little, too late. Within fifteen months, the Bretton Woods system collapsed.

The basic structure of the Bretton Woods system contained a flaw that began to emerge in the early 1960s. Bretton Woods was based on gold, but the global gold stock could not meet the world’s demand for international reserves, without which pegged exchange rates were impossible. Consequently, the United States provided dollar reserves by running a persistent balance of payments deficit and promised to redeem those dollars for gold at $35 per ounce. By 1961, however, the amount of dollar claims outstanding began to exceed the US government’s stock of gold. The deficit of gold implied that the United States might not be able to keep its pledge to convert dollars for gold at the official price. It might have to devalue the dollar.

The prospect of a dollar devaluation created strong incentives to exchange dollars for US gold. The US Treasury and the Federal Reserve tried to keep this from happening through stop-gap measures, but they could not solve the underlying paradox: Without additional dollar reserves, the system was unworkable; with additional dollar reserves, the system was unstable.

This difficult and uncertain situation became even worse after 1965. A rising US inflation rate expanded the US balance-of-payments deficit and pumped even more dollars abroad. Inflation in the United States rose from less than 2 percent in early 1965 to 6 percent by the end of 1969. The existing structure of fixed exchange rates seemed unsustainable in the face of such inflation. By the summer of 1971, speculators were moving funds out of dollars and into foreign currencies, and central banks were rapidly converting dollars into US gold.

In August 1971, President Nixon “closed the gold window,” that is, he no longer allowed foreign central banks to exchange dollars for the US Treasury’s gold. While the flaws of Bretton Woods and the Federal Reserve’s monetary policy had certainly played a role in the situation, Nixon also blamed the US balance-of-payments deficits on unfair trading practices and other countries’ unwillingness to share the military burden of the Cold War. He wanted foreign currencies to appreciate against the dollar, but he did not want to devalue the dollar in terms of gold (Silber 2012, 93).

Nixon’s actions sent shockwaves through the international community. A crisis atmosphere prevailed. Many key foreign currencies began to appreciate against the dollar, despite heavy intervention. Restraints on cross-border financial flows began to emerge. Monetary officials around the globe feared international monetary relations would collapse amid the uncertainty about exchange rates, the imminent spread of protectionism, and the looming prospects of a serious recession. Officials at the International Monetary Fund immediately pressed for negotiations to revamp exchange-rate parities and address other complaints about the international financial system (de Vries 1976, 531-556).

At the Smithsonian meeting, the United States agreed to devalue the dollar against gold by approximately 8.5 percent to $38 per ounce. Other countries offered to revalue their currencies relative to the dollar. The net effect was roughly a 10.7 percent average devaluation of the dollar against the other key currencies (de Vries 1976, 555).

At the Smithsonian meeting, countries also agreed to future talks on broader reforms of the international monetary system. Issues that would be discussed included the central role of the dollar, shared responsibility for exchange-rate stability, the future role of gold, a means for easing exchange-rate adjustment, and measures to deal with volatile financial flows. Foreign nations also agreed to comply with Nixon’s request to lessen existing trade restrictions and to assume a greater share of the military burden.

The Smithsonian Agreement did little to restore confidence in the Bretton Woods system. During 1972, speculators pushed many European currencies toward the tops of their permissible—but now wider—exchange-rate bands. By intervening, their central banks accumulated large amounts of unwanted dollars, which stoked inflationary pressures. Germany and Japan expanded their restraints on financial flows, and other countries began to follow suit.

Gold prices, a barometer of uncertainty, rose to around $60 an ounce by mid-1972 and $90 an ounce by early 1973. Speculation was rife. On February 12, 1973, with exchange markets in Europe and Japan closed, the United States devalued the dollar by an additional 10 percent to $42 an ounce. When markets reopened, speculation against the dollar became rampant. Within a month nearly all major currencies were floating against the dollar. The Bretton Woods system was finished (IMF 1973, 2-8).

Brian Twomey

China Currency Manipulation Vs Bretton Woods

Brettonwoods Basics 1. 1% exchange rate movements 2. exchangerate hashtagprices reflects trade. 3. Gold convertability to Fixed Price.
Bretton Woods strengthened. What changed, 1936 Tripartite Agreement ended 1930’s FX Tradewars by agree to end FX Competitive Devaluations, specifically UK and French Franc.
Led to Bretton woods.
2 US Congressional Laws govern FX and Currency Manipulations by treasury.
1. Omnibus Trade and Competitiveness Act 1988. 2. The Trade Facilitation and Trade Enforcement Act of 2015
The Omnibus Trade and Competitiveness Act of 1988 requires the Treasury to provide semiannual reports to Congress on international economic and exchange rate policy. Under Section 3004 of the 1988 Act, the Secretary must: “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” This determination is subject to a broad range of factors, including not only trade and current account imbalances and FX intervention , but also currency developments, exchange rate practices, foreign exchange reserve coverage, capital controls, and monetary policy
                      Brian Twomey

The Trade Facilitation and Trade Enforcement Act 2015

The Trade Facilitation and Trade Enforcement Act of 2015 calls for treasury to monitor macroeconomic and currency policies of major trading partners and conduct enhanced analysis of and engagement with those partners if they trigger certain objective criteria that provide insight into possibly unfair currency practices.

Key word Monitor, established Monitor list against 3 thresholds:

1. Trade Goods Surplus with US = $20 billion., 40 billion annual. Currently 21 nations in violation and accounts for 90% of all trade Surpluses with US.

The Monitoring List comprises Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam

2. Material Current Account Surplus = 2% of GDP, Previous 3%. and

3. Persistent one sided FX Intervention net purchases = 2% GDP over 6 -12 months., previous 8 -12 months.

china earned right to 2 year Monitor list, also agreed at G20 to refrain from Competitive devaluation.

Currency Manipulation Threshold, speculation is 10% movement over 6 -12 months.

China qualifies from 2018 lows 6.92. Criteria is from Long Run average?.

Bretton Woods remains only strengthened. 1% movements speculation equals 1 to 10% allowable movements.

2. Gold and Silver in free float still completely connected to Gold and Silver Currencies. Gold to Gold Currency spreads however are never far from each other and the same for Silver and Silver currencies.

The Gold Silver Ratio is more than an indicator to trade Gold and Silver but allows for trades in currencies at the same time.

 

Brian Twomey

Creation of the Bretton Woods System

A new international monetary system was forged by delegates from forty-four nations in Bretton Woods, New Hampshire, in July 1944. Delegates to the conference agreed to establish the International Monetary Fund and what became the World Bank Group. The system of currency convertibility that emerged from Bretton Woods lasted until 1971.

Delegates from 44 countries listen to Senator Charles Tobey speak at the plenary session of the United Nations Monetary Conference in Bretton Woods, New Hampshire.

U.N. Monetary Conference (Photo: Associated Press; Photographer: Abe Fox)


by Sandra Kollen Ghizoni, Federal Reserve Bank of Atlanta

The United Nations Monetary and Financial Conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire, where delegates from forty-four nations created a new international monetary system known as the Bretton Woods system. These countries saw the opportunity for a new international system after World War II that would draw on the lessons of the previous gold standards and the experience of the Great Depression and provide for postwar reconstruction. It was an unprecedented cooperative effort for nations that had been setting up barriers between their economies for more than a decade.

They sought to create a system that would not only avoid the rigidity of previous international monetary systems, but would also address the lack of cooperation among the countries on those systems. The classic gold standard had been abandoned after World War I. In the interwar period, governments not only undertook competitive devaluations but also set up restrictive trade policies that worsened the Great Depression.

Those at Bretton Woods envisioned an international monetary system that would ensure exchange rate stability, prevent competitive devaluations, and promote economic growth. Although all participants agreed on the goals of the new system, plans to implement them differed. To reach a collective agreement was an enormous international undertaking. Preparation began more than two years before the conference, and financial experts held countless bilateral and multilateral meetings to arrive at a common approach. While the principal responsibility for international economic policy lies with the Treasury Department in the United States, the Federal Reserve participated by offering advice and counsel on the new system.1 The primary designers of the new system were John Maynard Keynes, adviser to the British Treasury, and Harry Dexter White, the chief international economist at the Treasury Department.

Keynes, one of the most influential economists of the time (and arguably still today), called for the creation of a large institution with the resources and authority to step in when imbalances occur. This approach was consistent with his belief that public institutions should be able to intervene in times of crises. The Keynes plan envisioned a global central bank called the Clearing Union. This bank would issue a new international currency, the “bancor,” which would be used to settle international imbalances. Keynes proposed raising funds of $26 million for the Clearing Union. Each country would receive a limited line of credit that would prevent it from running a balance of payments deficit, but each country would also be discouraged from running surpluses by having to remit excess bancor to the Clearing Union. The plan reflected Keynes’s concerns about the global postwar economy. He assumed the United States would experience another depression, causing other countries to run a balance-of-payments deficit and forcing them to choose between domestic stability and exchange rate stability.

White’s plan for a new institution was one of more limited powers and resources. It reflected the concerns that much of the financial resources of the Clearing Union envisioned by Keynes would be used to buy American goods, resulting in the United States holding the majority of bancor. White proposed a new monetary institution called the Stabilization Fund. Rather than issue a new currency, it would be funded with a finite pool of national currencies and gold of $5 million that would effectively limit the supply of reserve credit.

The plan adopted at Bretton Woods resembled the White plan with some concessions in response to Keynes’s concerns. A clause was added in case a country ran a balance of payments surplus and its currency became scarce in world trade. The fund could ration that currency and authorize limited imports from the surplus country. In addition, the total resources for the fund were raised from $5 million to $8.5 million.

The Mount Washington hotel in rural New Hampshire, meeting place of the Allied nations for the Bretton Woods Conference

The Mount Washington Hotel, White Mts., N.H. (Photo: Library of Congress, Prints & Photographs Division, Detroit Publishing Company Collection, LC-D4-19762)

The 730 delegates at Bretton Woods agreed to establish two new institutions. The International Monetary Fund (IMF) would monitor exchange rates and lend reserve currencies to nations with balance-of-payments deficits. The International Bank for Reconstruction and Development, now known as the World Bank Group, was responsible for providing financial assistance for the reconstruction after World War II and the economic development of less developed countries.

The IMF came into formal existence in December 1945, when its first twenty-nine member countries signed its Articles of AgreementOffsite link. The countries agreed to keep their currencies fixed but adjustable (within a 1 percent band) to the dollar, and the dollar was fixed to gold at $35 an ounce. To this day, when a country joins the IMF, it receives a quota based on its relative position in the world economy, which determines how much it contributes to the fund.

In 1958, the Bretton Woods system became fully functional as currencies became convertible. Countries settled international balances in dollars, and US dollars were convertible to gold at a fixed exchange rate of $35 an ounce. The United States had the responsibility of keeping the price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility. The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfill its obligation to redeem dollars for gold at the official price. In 1971, President Richard Nixon ended the dollar’s convertibility to gold.

 

Brian Twomey

A new international monetary system was forged by delegates from forty-four nations in Bretton Woods, New Hampshire, in July 1944. Delegates to the conference agreed to establish the International Monetary Fund and what became the World Bank Group. The system of currency convertibility that emerged from Bretton Woods lasted until 1971.

by Sandra Kollen Ghizoni, Federal Reserve Bank of Atlanta

The United Nations Monetary and Financial Conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire, where delegates from forty-four nations created a new international monetary system known as the Bretton Woods system. These countries saw the opportunity for a new international system after World War II that would draw on the lessons of the previous gold standards and the experience of the Great Depression and provide for postwar reconstruction. It was an unprecedented cooperative effort for nations that had been setting up barriers between their economies for more than a decade.

They sought to create a system that would not only avoid the rigidity of previous international monetary systems, but would also address the lack of cooperation among the countries on those systems. The classic gold standard had been abandoned after World War I. In the interwar period, governments not only undertook competitive devaluations but also set up restrictive trade policies that worsened the Great Depression.

Those at Bretton Woods envisioned an international monetary system that would ensure exchange rate stability, prevent competitive devaluations, and promote economic growth. Although all participants agreed on the goals of the new system, plans to implement them differed. To reach a collective agreement was an enormous international undertaking. Preparation began more than two years before the conference, and financial experts held countless bilateral and multilateral meetings to arrive at a common approach. While the principal responsibility for international economic policy lies with the Treasury Department in the United States, the Federal Reserve participated by offering advice and counsel on the new system.1 The primary designers of the new system were John Maynard Keynes, adviser to the British Treasury, and Harry Dexter White, the chief international economist at the Treasury Department.

Keynes, one of the most influential economists of the time (and arguably still today), called for the creation of a large institution with the resources and authority to step in when imbalances occur. This approach was consistent with his belief that public institutions should be able to intervene in times of crises. The Keynes plan envisioned a global central bank called the Clearing Union. This bank would issue a new international currency, the “bancor,” which would be used to settle international imbalances. Keynes proposed raising funds of $26 million for the Clearing Union. Each country would receive a limited line of credit that would prevent it from running a balance of payments deficit, but each country would also be discouraged from running surpluses by having to remit excess bancor to the Clearing Union. The plan reflected Keynes’s concerns about the global postwar economy. He assumed the United States would experience another depression, causing other countries to run a balance-of-payments deficit and forcing them to choose between domestic stability and exchange rate stability.

White’s plan for a new institution was one of more limited powers and resources. It reflected the concerns that much of the financial resources of the Clearing Union envisioned by Keynes would be used to buy American goods, resulting in the United States holding the majority of bancor. White proposed a new monetary institution called the Stabilization Fund. Rather than issue a new currency, it would be funded with a finite pool of national currencies and gold of $5 million that would effectively limit the supply of reserve credit.

The plan adopted at Bretton Woods resembled the White plan with some concessions in response to Keynes’s concerns. A clause was added in case a country ran a balance of payments surplus and its currency became scarce in world trade. The fund could ration that currency and authorize limited imports from the surplus country. In addition, the total resources for the fund were raised from $5 million to $8.5 million.

The Mount Washington hotel in rural New Hampshire, meeting place of the Allied nations for the Bretton Woods Conference

The Mount Washington Hotel, White Mts., N.H. (Photo: Library of Congress, Prints & Photographs Division, Detroit Publishing Company Collection, LC-D4-19762)

The 730 delegates at Bretton Woods agreed to establish two new institutions. The International Monetary Fund (IMF) would monitor exchange rates and lend reserve currencies to nations with balance-of-payments deficits. The International Bank for Reconstruction and Development, now known as the World Bank Group, was responsible for providing financial assistance for the reconstruction after World War II and the economic development of less developed countries.

The IMF came into formal existence in December 1945, when its first twenty-nine member countries signed its Articles of AgreementOffsite link. The countries agreed to keep their currencies fixed but adjustable (within a 1 percent band) to the dollar, and the dollar was fixed to gold at $35 an ounce. To this day, when a country joins the IMF, it receives a quota based on its relative position in the world economy, which determines how much it contributes to the fund.

In 1958, the Bretton Woods system became fully functional as currencies became convertible. Countries settled international balances in dollars, and US dollars were convertible to gold at a fixed exchange rate of $35 an ounce. The United States had the responsibility of keeping the price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility. The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfill its obligation to redeem dollars for gold at the official price. In 1971, President Richard Nixon ended the dollar’s convertibility to gold.

 

Brian Twomey

Monetary Stabilization September 1936

Monetary Stabilization; September 25, 1936
Declaration by the United States, the United Kingdom, and France effected by simultaneous announcements at Washington, London, and Paris September 25, 1936;(1) supplementary statement of intention by the Secretary of the Treasury October 13,1936 (2)

 

Department of the Treasury press releases September 25 and October 13, 1936; Department of State Treaty Information Bulletin No.- 84, September 1936, p. 15, and No. 85, October 1936, p. 17

STATEMENT OF SEPTEMBER 25 BY SECRETARY OF THE TREASURY HENRY MORGENTHAU, JR.

1. The Government of the United States, after consultation with the British Government and the French Government, joins with them in affirming a common desire to foster those conditions which safeguard peace and will best contribute to the restoration of order in international economic relations and to pursue a policy which will tend to promote prosperity in the world and to improve the standard of living of peoples.

2. The Government of the United States must, of course, in its policy toward international monetary relations take into full account the requirements of internal prosperity, as corresponding considerations will be taken into account by the Governments of France and Great Britain; it welcomes this opportunity to reaffirm its purpose to continue the policy which it has pursued in the course of recent years, one constant object of which is to maintain the greatest possible equilibrium in the system of international exchange and to avoid to the utmost extent the creation of any disturbance of that system by American monetary action. The Government of the United States shares with the Governments of France and Great Britain the conviction that the continuation of this two-fold policy will serve the general purpose which all the Governments should pursue.

3. The French Government informs the United States Government that, judging that the desired stability of the principal currencies cannot be insured on a solid basis except after the reestablishment of a lasting equilibrium between the various economic systems, it has decided with this object to propose to its Parliament the readjustment of its currency. The Government of the United States, as also the British Government, has welcomed this decision in the hope that it will establish more solid foundations for the stability of international economic relations. The United States Government, as also the British and French Governments, declares its intention to continue to use appropriate available resources so as to avoid as far as possible any disturbance of the basis of international exchange resulting from the proposed readjustment. It will arrange for such consultation for this purpose as may prove necessary with the other two Governments and their authorized agencies.

4. The Government of the United States is moreover convinced, as are also the Governments of France and Great Britain, that the success of the policy set forth above is linked with the development of international trade. In particular it attaches the greatest importance to action being taken without delay to relax progressively the present system of quotas and exchange controls with a view to their abolition.

5. The Government of the United States, in common with the Governments of France and Great Britain, desires and invites the cooperation of the other nations to realize the policy laid down in the present declaration. It trusts that no country will attempt to obtain an unreasonable competitive exchange advantage and thereby hamper the effort to restore more stable economic relations which it is the aim of the three Governments to promote.

STATEMENT OF OCTOBER 13 BY SECRETARY OF THE TREASURY HENRY MORGENTHAU, JR. .

Supplementing the announcements, made by him on January 31,(3) and February 1, 1934,(3) to the effect that the Treasury would buy gold, and on January 31, 1934,(4) referring to the sale of gold for export, the Secretary of the Treasury states that thereafter, and until, on 24 hours’ notice, this statement of intention may be revoked or altered. the United States will also sell gold for immediate export to, or earmark for the account of, the exchange equalization or stabilization funds of those countries whose funds likewise are offering to sell gold to the United States, provided such offerings of gold are at such rates and upon such terms and conditions as the Secretary may deem most advantageous to the public interest. The Secretary announces herewith, and will hereafter announce daily, the names of the foreign countries complying with the foregoing conditions. All such sales of gold will be made through the Federal Reserve Bank of New York, as fiscal agent of the United States, upon the following terms and conditions which the Secretary of the Treasury deems most advantageous to the public interest:

Sales of gold will be made at $35 per fine ounce, plus one-quarter percent handling charge, and sales and earmarking will be governed by the regulations issued under the Gold Reserve Act of 1934.

Notes:

(1) Sometimes referred to as the “tripartite gentlemen’s agreement” or “arrangement.” A statement by the Secretary of State, Cordell Hull, in a Department of State press release of Sept. 26, 1936, reads in part:

“Naturally, I am immensely gratified to see a vitally important step in the direction of stable monetary arrangements.

“The action of the Treasuries of the three Governments in making simultaneous and virtually identical statements of policy should greatly strengthen the prospect of stability in international exchange relationships. This should result in further strengthening the basic conditions of our domestic recovery. The declarations of policy amply provide for taking into account the full requirements of internal prosperity. This advance toward stability should also greatly facilitate the reduction of excessive phases of quota, exchange controls, and of other excessive impediments to commerce between nations, which themselves were partly caused by exchange uncertainties. For it has been apparent for a substantial time that progress toward stability and the reduction of barriers to commerce should go forward concurrently, or as nearly as possible, simultaneously. The step taken is in harmony with our reciprocity trade-agreements program, as it is an indispensable part of any program for full and stable business recovery.” Back

(2) The Secretary of the Treasury announced on the same day that the United Kingdom and France had complied with the conditions specified in his statement for the purchase of gold from the United States for immediate export or earmark. On Nov. 24, 1936, he announced that reciprocal arrangements had been made also with Belgium, the Netherlands, and Switzerland as a result of their adherence to the principles of the tripartite declaration of Sept. 25, 1936. Back

 

Brian Twomey

Tripartite Agreement September 1936

The Tripartite Agreement was an international monetary agreement entered into by the United StatesFrance, and Great Britain in September 1936 to stabilize their nations’ currencies both at home and in the international exchange markets.[1]

History

Following suspension of the gold standard by Great Britain in 1931 and the United States in 1933, a serious imbalance developed between their currencies and those of the gold bloc countries, particularly France. The devaluation of the dollar and the pound sterling raised import prices and lowered export prices in the United States and Great Britain.

In the United States and Great Britain sound money advocates were divided between those favoring reforms to stabilize the currency and others who called for an end to the gold standard and a managed currency.[2][3][4]

Agreement

The Tripartite Agreement was informal and provisional.[5] Subscribing nations agreed to refrain from competitive depreciation[6] to maintain currency values at existing levels, as long as that attempt did not interfere seriously with internal prosperity. France devalued its currency as part of the agreement. The remaining gold bloc nations, BelgiumSwitzerland and the Netherlands, also subscribed to the agreement.

Subscribing nations agreed to sell each other gold in the seller’s currency at a price agreed in advance.[7][8] The agreement stabilized exchange rates, ending the currency war of 1931 – 1936,[9] but failed to help the recovery of world trade.

 

Brian Twomey