Federal Overnight Reserve Repurchase Repo and Fed Funds Implications for 2015

When the Federal Reserve began to pay interest against bank deposits was first granted in 2006 when the United States Congress passed the Financial Services Regulatory Relief Act of 2006. The legislative start date was 2011 but the mortgage collapse caused a deep conundrum in housing and other markets in 2008 so Congress then passed the Emergency Economic Stabilization Act of 2008 to begin immediately to pay interest on required reserves for the third time in 50 years. Prior to 2008, the Fed paid interest on required reserves for two months total in 2001 at the time of 9/11 and the beginning of the 2007 recession. Two purposes existed to pay interest on required deposited reserves: to maintain the Fed Effective Funds rate close to target and in range and prevent Fed Funds from trading at 0 or worse trade in negative territory as is the case in regards to Eonia in Europe despite ECB ability to pay required interest reserves since 1999. The other example is Sweden’s Repo Rate currently trades at 0 while the BOE was granted legislative capability to pay interest on required reserves since 2009 to offer worldwide context.

The second aspect to the 2008 legislation is the Fed’s ability to pay and adjust interest on excess reserves but this new Fed “tool” was little known and employed yet would become an interesting foresight as excess reserves and the velocity of the Fed’s balance sheet in relation to the historic monetary base skyrocked from 2008 / 2009 onwards when various Tarp facilities were introduced to provide liquidity to the banking system. Required Reserves for example averaged about $100 billion during the first six months of 2012 while excess reserves averaged $1.5 trillion. ( SF Fed ). Since the supply of Treasury bond credits is as good as demand, the Fed faced a Liquidity Trap where monetary policy fails to stimulate demand and interest rates are at 0. So comes the time to soak up the excess supply by introduction of new Term Deposit Facilities.

The first facility is the Fixed Rate Overnight Reverse Repurchase Agreement ( ON RRP) while the second is the Interest on Excess Reserves or IOER. The ON RRP is the primary tool to move Fed Funds into target ranges and create a floor for Fed Funds by setting Bid rates for Treasury bonds only while the IOER would serve as offer rates but both rates held within a small channel between 0 – 5 basis points or 0 – 0.05. ( Sept-Oct Minutes). Therefore Bid rates must be below offer rates at 0.05. The further proposal since both facilities are new and hardly in implementation stages is to offer a maximum Bid rate of 10 basis points. Further ON RRP proposals is to vary rates by auction, by a schedule and vary the spread between the ON RRP and interest paid on excess reserves. Both facilities are for Treasury bonds only with a maximum market of $300 billion per day and limited to 1 bid per $30 million, per counter party, per day. The $30 billion per day was originally $10 and changed with September’s minutes by a vote of the Board.

To place 0.05 in context, Fed Funds closed on a monthly average basis at 0.09 in 11 of the past 17 months and in 9 of the past 12 months. Fed funds closed above 0.09 twice in the last 19 months at 0.10 and 0.11. Last time Fed Funds closed at 0.20 was 55 and 54 months ago. The highest monthly close at 0.22 was seen 5 1/.2 years ago specifically 69 months. The Fed Funds 2 year average is found at 0.10, 5 year average at 0.12 and 10 year average is found at 1.62. Essentially, the entire Repo market is found beween Bids from 0 – 0.05 to Offer Rates from 0.05 – 0.10, 0.12.

The ON RRP operates as any Repurchase Agreement. The NY Fed sells bonds to approved counterparties with agreement to repurchase at a later date. The sale minus the repurchase price equals the rate of interest paid by the Fed on cash invested by the counterparty, termed the Repo Rate. Fed deposits are then limited to Reverse Repos. Current operations are facilitated from 12:45 pm – 1:15 pm Eastern time and rates of interet on excesees are reported on the Federal Reserve’s website on H3 every Thursday at 4:30 pm Eastern time. Trade durations are overnight with a same day settlement.

Fed examples ( NY FED). Assume 5 Bids at $5 billion each at varying rates between 1- 5 basis points. Bids were under the $300 billion market maximum and under 5 basis point limits so Bids would be granted. Assume 20 Bids at $20 billion with 4 Bids submitted at 1, 2, 3, 4 and 5 basis points. Total Bids exceed the $300 billion maximum at $400 billion so Bids at 1, 2 and 3 are granted and the 4 basis point bid is awarded 75% of the bid or $15 billion while the 5 basis point Bid is not awarded to allow the market to maintain its $300 billion Maximum.

Repurchase Agreement markets accompany a Stopout Rate and its the rate ” by evaluaton of total Bid Rates in ascending order by bids up to the point where total quantity of offers equals overall size limits. The purpose of the Stopout rate is to control the $300 billion market maximum. If sum of bids is greater than size limits, awards are allocated using a single price auction based on the Stopout Rate while bids below the Stopout Rate are granted on a pro rata basis.”

To understand current debt, the Congressional Budget Office reports released July 2014 states as a % of GDP, federal debt held by the public is 4.3 times greater than federal revenues. For 2014, Federal Spending was 20.4% Vs revenues of 17.6% , a minus 2.8% gap. Historic 40 year average revenues were always 17% of GDP but projected at 19% by 2039. But debt on current paths equates to 106% of GDP by 2039. Interest payments in 2014 was $231 billion or 1.3% of GDP and projected $799 billion in 2024 or 3.9% of GDP. Traditional insolvency methodology occurrs when Interest on Debt approaches upper teens. By end 2008, Fed debt held by the public was 39% of GDP and close to decades long average but end 2014 is expected to 74% of GDP and 2 times more than 2007 and higher than any year since 1950.

Deficits caused debt growth, projected at 74% of GDP or $506 Billion by end 2014. In 2009, deficits were 10% of GDP below the 40 year average and 2.9% for 2014 but $170 billion lower than 2013. Spending is expected to rise 2% to $3.5 trillion.

The all important Debt to Tax Ratio was 3.6% in 2009 and now hovers at + 4%. From 1980 – 2008, the Debt to Tax Ratio was 2% and held steady. If by 2039 debt to GDP at 106% with 19% revenues equates to a whopping Debt to Tax Ratio of 5.5%. Current Debt to Tax Ratio at 4% is the highest since the 1940’s while lows at 1.5% was seen in the 1970’s.

November 2014 monthly data based on Treasury information revealed Bills outstanding and held by the public comprised in millions 1, 438, 321 Vs 1, 626, 460 in October 2012. Notes in November 2014 comprised 8,182, 673 Vs 7, 320, 862 in October 2012. Bonds in November 2014 comprised 1, 563, 086 Vs 1, 296, 664 in October 2012. Total Fed holdings in millions: 2, 461, 625 as of November 2014. Bonds and Notes comprise the largest Fed holdings and are the prime tradeable instruments in Repo markets due to greater price fluctuations and ability to profit. Since Repo facilities trade durations are overnight, banks and money markets funds earn ability to profit from a higher overnight rate than what could be earned from a 1 month Treasury bill at current 0.02, 3 month Treasury at 0.01 and 6 month Bill at 0.08.

The Term Repo Facilities are expected to end by January 2015 particularly outlined by Fisher in recent speeches. A personal read of past Fed minutes reveals in my estimation the methodology to raise the Fed Funds rate would occur on a gradual scale by raising the Bid and Offer ranges within ON RRP and IOER. Once ranges were raised to acceptable levels to create a sufficient floor, a rate rise would occur imminently. But this assumption assumes ON RRP and IOER remain as more than the experiment as intended because actual trading of loans must be seen on a longer term scale. It also assumes the Fed owns another facility to control the Fed Funds rate as a policy more than a market rate for the foreseeable future. If the facilities remain, the guide to a Fed Funds hike should be found when Bid Rates are raised above the 5 year average at 0.12 but ultimately to 0.25 as is the present rate. A new floor is then created. The actual Fed Funds rate would be found on a 1/4 point rise between 0.50 – 1.62.

Published FX Trader Magazine

Brian Twomey, Inside the Currency Market, btwomey.com


Australia: The Early Years
 New South Wales was founded in 1770 by British explorer Captain James Cook, given its formal name and established as a legal colony in 1788. Later in 1863, the British separated the land to form further British colonies of Tasmania, South Australia, New Zealand, Victoria, Queensland and the Northern Territory. Founded inside the borders of New South Wales is today’s capital, Canberra and most important city Sydney and would become vital components to Australia’s legal declaration as a nation in 1901, Australia’s central bank and AUD as a single free float currency. But the road for Australia to become the nation and currency we know today was not an easy journey.
 Imagine the early explorers revelation when they found New South Wales and Australia in particular with an abundance of natural resources such as Coal, Iron Ore, Tin, Nickel, Bauxite, Copper and later Gold, Silver, Natural Gas and Petroleum. Iron Ore was the first suspected resource identified by Captain Cook when his compass failed in many locations. He also found “not sand but deep black soil capable of producing any type of grain.” The problem wasn’t the natural resources but the system of trade.
 Early year complications included not only lack of banks and a central bank but a system of exchange and various currencies employed as a system of trade found severe shortages because currencies left the territory by way of merchant ships and residents spent currency only when the need arose. Various currencies deployed between 1780’s – 1814 was the Indian Rupee, Dutch Guilder, Spanish Real, British Sterlings ( Silver Pennies as the formal name) and internal barter of natural resources: Copper and Rum. Early Notes of credit termed Police Fund Notes and backed by the English Treasury were issued by banks but fear was notes were subject to and found counterfeiters. Police Fund Notes were just one type of note issuance during this period and all found problems. Not until the Spanish Holey Dollar became the first ever minted and legislated coin did Australia enter a new period because confidence was instituted in a currency with not only Government backing but a fractional dimension was introduced to understand a currency value to formally trade goods.
 The New South Wales government under then and well known Governor today, Lachlan Macquarie purchased 40,000 Spanish Reals due to the Real’s world dominance then and cut the center from the Reals to double the number of available coins. The coins were formally minted and known as Holey Dollars with official Australia backing and began circulating in 1814. The center of the coins became known as Colonial Dumps and were fixed at 15 Pence per Dump while the official Holey Dollar was Fixed at 5 Shillings per Holey Dollar. Again, shortages developed due to increased natural resource trade and growing populations so in came the British as they imposed the Sterling Standard throughout its vast empire.
 The British relieved the shortage pressures and 40 year attempt to institute an exchange system by legislating a Sterling currency in 1825 although accounts specify brisk trade of Sterling occurred as early as 1822. As the British introduced a new Gold piece and imposed the Gold Standard in 1821, all nations under its vast empire were subject to the new Sterling Standard. Australia was a prime target so approximately, 30,000 Pounds Silver arrived and it was here that began Australia’s long, long history as the Australian Pound that would span about 150 years.
 The term “about” was stated because evident throughout Australia’s history, legislation was always late to actual currency and other market developments. Changes in early Australia occurred as people movements or from those market participants that wished for adjustment so all demanded corrections from Australia’s government.
 Quite evident from modern day Reserve Bank Governor speeches from 1960 to present day is Australia is not only a very conservative government traditionally but market adjustments occurred slow and gradual with a need for consensus from government representatives. Consensus took time particularly in Australia as spirited political debate was always the norm and dates its history from its early beginnings. Legislation was never forward, it was always a response to market developments that were already implemented. With formal recognition of RBA true independence by Australia’s government in 1996 and with full powers to fully implement monetary policy independently, the ties between the RBA and Australia’s Treasury Department was severed.
 From 1825 until the 1966 decimal system was introduced and Australia’s end to the Pound Fix in 1967, the Australian currency was known as the Australian Pound. Official RBA accounts always addressed the Fix end as 1971 but 1967 began actual market trading with price swings from 1967 onwards. AUD/GBP would share a 150 year relationship. Two problems existed however, Australia wasn’t formally a nation and official adoption of a currency wasn’t legislated. The impetus in this relationship was Gold.
 Gold was found in the 1850’s and prosperity came to Australia. Banks were formed, populations grew and Gold coins were minted backed by Gold in circulation. Australia’s Museum of Currency Notes reports the population tripled to 3 million between 1858 – 1889 and banks saw an explosive increase. In 1851, 8 trading banks ( Commercial Banks, traditionally referred as trading banks by Australia) and 24 branches existed but by 1890, 33 new banks opened accompanied by branches that exceeded 1500. As depression occurred in the 1890’s due from credit booms, many banks failed but reopened later after Australia became a nation in 1901.
 As Australia’s six self governing British colonies voted and approved Federation, a constitution and ratified by the English Parliament in 1900, a new nation was born January 1901 when Australia adopted and called the new nation: Commonwealth of Australia. The new Commonwealth would include New South Wales, Tasmania, South and Western Australia, Queensland and Victoria. The first Parliament would convene May 1901. The first acts of the new parliament was adoption and issue of a currency and notes with full government backing.
                   AUD History
From 1910 – the 1983 free float, AUD journeyed through first the Fix to AUD/GBP, Fixed to USD, Fixed to its TWI ( Trade Weight Index) then Fixed as a Crawling Peg to the TWI basket. Finally in 1983, the free float began and the free float was purely a clean float.
 Formal adoption of AUD adopted but not Fixed to GBP occurred with passage of the Australian Notes Act in September 1910 and the Australian Notes Tax Act in October 1910. The first ever official notes were issued in 1913 based on the British system where 12 Pence = 1 Shilling and 20 Shillings equates to 1 Pound. A 10% per annum or as the legislation states 10 Pounds per Centum tax was imposed on all bank notes issued or reissued by any bank in the Commonwealth. Consistent with Section 51, Subsection 12 of Australia’s constitution, the powers to coin and issue was placed under government Treasury Departments. No mention of a central bank and it is here why the RBA was not only slow to develop but slow to gain its independence once it was formed due from Treasury constitutional dominance.
 AUD/GBP from March 31, 1919 – August 31, 2014, the historic trading range saw its lowest low at 0.3333 December 31, 2001 and highest high December 31, 1976 at 0.7824 with an opening price that day of 0.7458. Not only were both prices extreme rarities throughout AUD/GBP’s history but other Fix periods accounted for those price swings.
 The formal AUD/GBP Fix occurred June 30, 1931 at 0.3846 with a more formalized Fix one year later June 30, 1932 at 0.4000. The original 0.3846 Fix during this period means opening, high, low and closes remained the same price at 0.3846. Breakdowns in the Fix first appeared March 31 , 1932 as the market was moving towards the 0.4000  point. The 0.4000 point held as open, high, low and close from September 30,1932 – June 30, 1947, 15 years.
 A new Fix then developed September 30, 1952 at 0.3984 and held until December 31, 1967, 15 years. AUD/GBP trading ranges in the interim period from 1947 – 1952 hardly saw a 10 pip move on any given day. From June 30, 1931 – December 31 1967, AUD/GBP didn’t move nor saw a 10 pip price change on any given day in 36 years. Responsibility for  price movements was placed on Gold and Deflation.
 AUD/GBP from March 31, 1919 – 1931 Fix saw trading days of 20, 50 pips and a rare day March 31, 1920 at 441 pips. June 30, 1924 was another rare 123 pip day. The exchange rate was very stable between 0.4900 – 0.5200 but it was obvious June 30, 1930 the market was moving towards another period when AUD/GBP broke its 0.4900 range and opened the next day at 0.4700’s and then moved steadily down towards the 1931 Fix at 0.3846. The conundrums during this period were many but all involved GBP and the UK rather than Australia.
 If AUD/GBP traded between 0.4900 – 0.5200 then GBP/AUD ranged between 2.0408 – 1.9230. If AUD/GBP was moving towards the 0.3846 Fix then GBP/AUD was moving up to 2.6000.
 The period from 1870’s until 1931 was characterized as the Gold Standard where currencies were valued based on Gold prices. GBP left the Gold Standard in 1914 and 1916, returned in 1925 and formally left permanently in 1931. The explanation to spikes in AUD/GBP was characterized as times when GBP suspended then reentered the Gold Standard. The 1925 event was an actual devaluation of GBP/USD to its pre war rate at 4.86 and was called for by Churchill. When GBP permanently left the Gold Standard in 1931, all currencies free floated with wide price swings on any given day that ranged between 500, 1000, 1500 and even 2000 pip days.
 The UK saw higher exchange rates coming in times when serious deflation, deficits and debt was the order of the day for many nations due from WW1. To retain the Gold Standard wasn’t the way to assist to alleviate its many economic problems due to small movements in exchange rates versus Gold. What the UK didn’t see during this period was all nations suffered serious economic effects and had acceptable exchange rate prices for their currencies to export goods and regain economic health. This led to true currency wars where nations engaged in destruction of the next nation’s exchange rate to gain export advantage. The Tripartite Agreement was signed in 1936 by all nations and all agreed not to engage in “Competitive Devaluations” of the next nation’s exchange rate.
 The UK devalued twice more during Australia’s Fix period. In 1947, GBP/USD was devalued 30% from 4.03 – 2.80 while Australia revalued AUD/GBP higher to 0.4600’s. In 1967, GBP/USD devalued yet again and it was here where Australia ended its Fix to AUD/GBP in favor of its next period.
 For Australia and the AUD/GBP Fix period, it can only be classified as smart, yet protective and possibly defensive. If a currency is Fixed, it means budgets are also fixed at specific levels. But just as GBP went through devaluations Vs USD, Australia was fighting another battle with USD because AUD was also fixed to the United States Dollar.
 Officially, AUD/USD was fixed to USD from 1945 – 1971 and became the center of RBA Monetary policy during this period because RBA policy was adjusted based on USD monetary policy to protect the exchange rate. The Fix period ended December 30, 1971 but the start date is questionable because more than one Fix price was observed throughout the early 1940’s. The key to understand the early and middle 1940’s is the Bretton Woods Fixed exchange rate to $35 per ounce Gold system was signed in July 1944 and implemented so the market possibly was pricing various peg adjustments. Consider as well Fix prices were only allowed a 1% deviation fluctuation above or below by Bretton Woods agreements.
 From 1940 – 1943, the Fix price was 1.6100, 1943 – 1945 saw a Fix price of 1.6080. 1945 – 1949 experienced another 1.6100 Fix while 1949 – 1971 set the Fix at 1.1200. From 1949 – 1971, AUD/USD traded somewhere not far from 1.1200 but spent most of its life at 1.1100’s. Because of the Fix Pegged system beginning about 1940, exchange rate prices saw again 20 and 50 pip trading days for 31 years. To understand the context for Australia, the early years must be viewed.
 From 1919 – June 30, 1931, AUD/USD ranged from 2.4300, 2.2200, 2.2300 and eventually winded its way down to 1.8000 by June 1931. Then the Fix prices at 1.6100’s began in the 1940’s. From 1919 – 1931, price swings of 500, 1000, 1500 even 2000 pip days were common. If the 2.4300, 2.4000 highs are considered from 1919 and 1920, AUD/USD has embarked on a 95 year downtrend if today’s 0.9300 price is further considered. 
                         AUD/USD and TWI
 As the Gold Standard was lifted formally by the 1971 Smithsonian Agreement in December 1971 and officially in 1973 by United States President Richard Nixon, currencies again free floated after a 33 year hiatus. Nations then began adoption of Trade Weight Indices to understand prices of their own currencies versus other nations for import and export and contractual purposes. AUD was fixed daily to the US Dollar based on its Trade Weight Index number then to the trade weight basket as their next experiments. But as a reminder from Australia’s early days when currency shortages occurred, Australia maintained an Exchange Control Policy. Limits were placed on number of shares owned by foreigners, restrictions on foreign owned financial companies, import and export controls, registration of foreign banks, foreign currency amounts crossing borders. When AUD free floated in 1983, all Exchange Controls were lifted that derived primarily from the Banking and Foreign Exchange Regulation Act of 1959. The primary message to markets, investors and the world was capital controls were lifted and Australia was open for business.
 AUD/USD was next Fixed daily to USD based on its Trade Weight Index from officially September 1974 – 1976. The Fix period began in 1974 at 1.4825 and saw lows of 1.0005 but when the time ended is unknown because of the massive swing in prices and because the period ended only to roll into the next TWI Fix period. End time speculation derives from the 1976 Fraser Government’s desire to devalue AUD against Treasurer Keating’s objections. A long fight ensued regarding devaluation with a win for Prime Minister Fraser but how much and when the devaluation occurred is not seen in the markets.  A view of trading days during this period fails to reveal a sustained Fix price based on open, high, low and closing prices. What was seen only was large price swings daily. Part of the price swing reasons may be due to ending of Bretton Woods and abandonment of the Gold Fixed Peg system in 1973.
 The TWI experiment ended in favor of the Fix to the larger TWI basket. This would be termed a variable or Crawling Peg. The Crawling Peg would become the mainstay system from 1976 until AUD/USD was formally free floated December 1983 at 0.8975. RBA head Glenn Stevens in a 2013 speech credits the free float price at 0.9000. The 1976 Fix saw price swings on any given day at about 500 pips.
       From Pound to Dollar
 Formal separation as the Australian Pound was completed in 1966 with passage of the Currency Act of 1965 from Pounds to the present name Australian Dollar. Shillings, Pounds and Pence  were converted to a new 100 cent decimal system with a  conversion rate at unofficial estimates of 2 AUD = 1 GBP. Since Australia’s Monetary Policy was closely tied to USD, it was also vital to Australia’s economic health to price AUD higher than USD.
              AUD/USD The Free Float
 After 203 years since Australia was founded in 1770, AUD free floated and allowed for the first time in history that monetary policy was not set by exchange rates. Early free float years however was characterized as holding AUD/USD’s values.

                         AUD Free Float Interventions.
 The early years of AUD/USD were characterized as interventions particularly 1989 and 1990 when the RBA intervened 145 and 111 times but serially spread over the years. In 1989 for example, the RBA intervened in 11 of 12 months and over a series of days. June 1989 saw 18 interventions, September 1989 saw 19 interventions. This pattern would repeat itself throughout 1990. Factor 253 United States trading days and 254 for Australia, the RBA was in the market over half of the trading days in 1989 and almost half of every trading day in 1990. The first intervention occurred in 1985.
 Based again on the 2013 Stevens speech because RBA intervention data dates to 1989, the first major intervention occurred November 1985 then July 1986 “when AUD/USD fell 38% in 18 months and threatened to fall further”. The third intervention occurred the following year in January 1987. 
  The 1980’s was classified as volatile due because the Plaza Accords were agreed and signed September 1985 to depreciate the US Dollar and Australia was not a signatory nor invited to the talks because they weren’t a member of the then G-7 nations. The G-7 nations reconvened two years later to sign the Louvre Accords in February 1987 to stop the decline of the US Dollar. The second volatility consequence was Australia’s government under Bob Hawke’s Australia Labor Party proposed in 1984 and implemented in 1985 to remove interest rate ceilings on loans and deposits as part of a larger financial deregulation of Australia’s finance and bank system introduced in the 1981 Campbell Report.
  Australia and AUD/USD suffered the effects as December 31,1984, AUD/USD opened at 0.8320, traded its lowest low December 31 1986 at 0.6308 and opened at 0.7105 December 31, 1987. AUD/GBP opened at 0.7125 March 31, 1985 and by December 31, 1987, opened at 0.4391. By the 1990’s, interventions would continue.
 From 1991 – 1998, interventions progressively decreased from the 1991 high of 57 to the 1997 low of 2 and 12 in 1998.
 Beginning in the 2000’s decade, 2000 saw 17 interventions while 2001 experienced 19. From 2001 to present day, the RBA intervened only as a result of the United States August 2008 Housing crisis. Then, the RBA intervened once in 2007 and nine times in October and November 2008. AUD/USD July 2007 experienced a market price of 0.9838 then saw a drop to 0.6021 by October 2008. Interventions since 2008 ended although three recent speeches by RBA head Stevens mentioned AUD/USD’s overvaluation and the July 2014 RBA Minutes revealed AUD/USD was not only overvalued based on “historical standards” but commodity prices were also low. The point regarding commodity prices is vitally important to understand AUD, its early free float and interventions.
 Along with the free float, a discussion originated in the 1984 -1985 Australian Parliament to understand AUD’s type of currency. An official Government report was released and revealed AUD moved in the markets based on its exports of Commodities. Then, Australia was exporting primary products of Wheat, Coal and Petroleum but importing less manufacturing products. The suggestion to smooth the exchange rate was import more manufacturing products. As time progressed, exports of commodities and various types grew exponentially to the point exports in the last 10 years comprise 55% of total exports and account for 11% of GDP.
 From the 1984 -1985 period is when work began to construct Australia’s Index of Commodity Prices but the overall discussions began as a result of the 11.07 billion Current Account deficit in 1984 – 1985 and 14.50 in 1985 – 1986. AUD then became known informally as a Commodity Currency and various commodities important to Australia began a close tracking of prices in relation to exchange rates because exports from free float beginnings were exported in either AUD, USD or Special Drawing Rights. Why the “informal” mention of AUD as a commodity currency is in its formal yet historic definition. A true commodity currency is money backed by gold as opposed to fiat money backed by the economy. While AUD was on the Gold Standard, it was truly a commodity currency but shifted to Fiat as the free float began.
 Whether the RBA has an explicit intervention policy is unknown but the common theme throughout Australia’s years is interventions occur when Fundamentals are not aligned to the exchange rate. Part of the fundamentals concern commodity prices as much as balance of payments and other economic releases. A high exchange rate in light of low commodity prices is as much ground for intervention as much as an exchange rate misaligned to any economic release but the focus is primarily commodity prices. The historic assumption since the free float is a high exchange rate in AUD/USD occurs when Australia’s natural resources are demanded and a low exchange rate when commodity prices are low. Traditional RBA intervention practice is verbal warnings are issued directly to market participants then intervention follows.
                AUD/USD Long Term Averages
 If the December 1983 post float average at 0.7626 is considered, AUD/USD is not only not overvalued but the calculated target is 0.8928 and is well within the distribution between 1.1532 – 0.8503.
 If averages from 1970 and 1971 at 0.8861 and 0.8802 are factored, AUD/USD is vastly oversold with targets at 1.1190 and 1.1125. Both average distributions lie within neutral zones between 0.8076 – 0.8645 and 0.8019 – 0.9584. The common theme among the three averages is bottoms are found at 0.8076, 0.8064 and 0.8019.
 Between 25 and 20 year averages at 0.7643 and 0.7696, targets become 0.9226 and 0.9028 and neither average is oversold / overbought as prices trade middle range inside both distributions. Prices at 0.8109 and 0.8211 must break to see lower prices.
 The 14 year average at 0.7990 targets 0.9680 and price lies inside a distribution between 0.9129 – 1.3060.
 The 10 year average at 0.8806 targets 0.9976 and price lies between the distribution at 0.9594 – 1.2315. A break of 0.9200 in the neutral zone reveals a new shorter term distribution would fall between 0.8806 -0.9200.
The 5 year average at 0.9732 targets 0.9068 and prices are within a distribution between 0.9732 – 0.9284.
 The common theme within a 5- 55 year historic walk is all averages lie beneath present prices except the 5 year and all remaining averages are not threatened by breaks anytime soon. Further, all averages are either vastly oversold or approaching middle bounds between oversold and overbought. As the world regains its economic composure once again, AUD/USD has the potential to see far higher prices over time.
             Monetary Policy
 Australia’s Monetary Policy foundation began with passage of the 1911 Commonwealth Bank Act, a main bank in Australia  today. The bank was established with 1 million Australian Pounds where bank profits were distributed between a Reserve and Redemption fund.
 The RBA was born from early Commonwealth Bank beginnings and the relationship growth between Reserve and Redemption. Not until passage of the 1959 Commonwealth Bank and Reserve Bank Acts would the RBA receive official birth when the Commonwealth bank was split into the Commonwealth Banking Corporation and the RBA became a separate entity.
 Issues regarding the Commonwealth Bank’s Reserve and Redemption Funds was seen in the 1920 Notes Act when issuance of Australia’s notes became the sole domain of the Commonwealth Bank from Australia’s Treasury Department’s origin as originator. A Note Issue Department was established and existed until 1924 when a Bank Board was created to issue Notes. The Bank Board would exist to issue Notes for the next 35 years until the RBA would assume control in 1959 / 1960 under a formal Reserve Bank Board created by the Bank Act of 1959. The move would become the first formal powers toward an independent Central Bank despite calls dating to the 1920’s when questions arose regarding exchange rates, credit, size and scope of Notes issuance, budget amounts and Australia wasn’t on the Gold Standard then. Many problems existed in the early 1920’s but essentially the Commonwealth Bank was the Bank for the Australia Government from 1920 – 1960. The 1945 Bank Act allowed Commonwealth Bank to pursue a monetary policy with goals to achieve currency stability, full employment and prosperity. Further, the 1945 Act allowed Commonwealth Bank to pursue a monetary policy “beyond Australia if necessary”. By passage of the 1951 Banking Act, monetary policy transferred to a board. The 1953 Bank Act not only affirmed rate of interest would remain the same but it was illegal for Gold to leave Australia. Monetary policy began due to the Reserve and Redemption funds however slow.
 Monetary policy was again a slow and gradual process until 1976. The focus from the 1920’s – 1970’s regarded fixed exchange rates coupled with Fiscal policy. The 1930’s experienced depression and war, GDP for example dropped 10% in 1931. The late 1930’s addressed questions of Macroeconomics in the Australian Parliament and resulted in a 1937 Royal Commission report. Over 200 economists testified regarding adoption of various macroeconomic policies prudent for Australia such as recommendations for Keynesian economic policies, high versus low taxes, free float versus fixed exchange rates, independent central bank, control interest rates, allowance of private sector growth vs government growth, regulation and non regulation of banks. Testimonies spanned a large spectrum of economic issues.
 Budgets however were fluid over the years particularly during the early periods through various devaluations of GBP and its effects to Australia. The 1947 GBP devaluation was still seen in the 1950 Australian Parliament for example when the devaluation was prominent regarding Australia’s proposals to export Wool and ability to obtain its proper price based on Australia’s exchange rate. 
 Fiscal policy and taxes in relation to fund government budgets became a mandatory tool particularly when Interest Rate Controls were placed on Australian Government Bonds. Monetary policy was first seen in the 1970’s when reform slowly began and for the RBA to obtain independence, it was first seen in removal of interest rate ceilings.
                                             Interest Rates
 Until September 1973 when interest rate ceilings were removed on Certificate of Deposits, interest rate controls were enforced on bank deposits, interest charged on loans and maturities on term deposits. By 1980, full interest rate ceilings and fixed deposits were removed but most important was banks entered the market fully to compete for overnight funds. The overnight Cash Rate began trading in May 1976 with actual Cash Rate targets first seen in August 1990. Once removal of bank restrictions to raise funds less than 14 days was implemented in 1984, Australia’s interest rate markets were fully developing. For example, interest rate ceilings were removed on bank loans less than 100,000, interest was paid on large deposits held less than 14 days and small deposits less than 30 days. Term deposits increased longer than four years. Despite the transfer of power to set the overnight interest rate from the Bank Board to the RBA, responsibilities and independence would not implement fully due to the gradual process to trade Bank Bills.
 Bank Bills are security investments ranging from 1 -180 days. Two forms exist, Bank Accepted Bills and Bank Endorsed Bills. A Bank Accepted Bill is a Bill of Exchange and accepted by banks where banks pay face value at maturity. A Bank Endorsed Bill is a Bill of Exchange endorsed by the bank. Simplistically, Bank Bills today are Bank Accepted Bills that comprise negotiable Certificates of Deposit that range from 30, 90 and 180 day terms and are by far the most important interest rates in Australia to understand the term structure of interest rate paths. The overnight rate is also vital but its a 1 day rate and assists in the daily view of interest rate paths.
 When interest rate ceilings were removed, only the 90 day Bank Bill was available for trade and its trade data dates to 1969. The 30 and 180 day Bank Bills began trade in July 1992 and the Cash Rate Target began trading August 1990. To understand Australia’s interest rate paths was only to view the Overnight Cash Rate and the 90 day Bank Bill. Viewed together, both contained wide variations.
 Consistent with 1900’s Swedish economist Knut Wiksell and his Neutral Interest Rate viewed from 20 – 50 years to understand an economy’s economic context, Australia’s current 90 day Bank Bill rate is far below the Neutral interest rate. The 20 year average is found at 5.33, 25 year at 6.13, post 1983 free float at 7.67 and since 1969, 8.44. Targets range from 3.27 – 4.22 and price at 2.63 is approaching bottoms. If any wonder existed how AUD/USD would see far higher levels, its found in Bank Bills because Australia’s economy seen from interest rates is underperforming.
 The point of reference is the RBA doesn’t disclose nor offers information regarding its Neutral Interest rate but not only does New Zealand employ the 90 day Bank Bill as its Neutral Interest Rate but its the rate suggested by  Wiksell and employed by many nations today.
                            Monetary Policy
 Australia’s Parliamentary authorities realized early in the 1970’s world economics as a whole was headed towards interdependence particularly under a free float exchange rate system where nation’s were most interested in protecting and properly aligning currency prices versus the next nation. Exchange rate markets journeyed full circle from the 1920’s volatility to fixed periods, Gold Standards and to outright destruction of another nation’s exchange rate. 
 Interdependence was an economic system where all nations would adopt the same policies as the next nation but accompanied with certain twists and tweeks in each nation. Economics in its own right also adopted a full circle approach from serious deflation in the 1930’s to exhorbitantly high inflation in the 1970’s. The 1930’s witnessed government controlled Keynesian policies while the 1970’s experienced monetarism to target and adjust money supplies. Australia was no different in this regard as they first adopted discretionary budgets.
                      Monetary Policy 1971 – 1985.
 Monetary Policy from 1971 – 1976 was classified as discretionary budgets. If Real spending growth by CPI is a gauge, 1975 -1976 was the only negative cash balance year within the period.
 From 1976 – 1985, Australia adopted a monetary policy titled Monetary Targets where the target was M3 money and set by the Treasury. In light of interdependence, the United States, Germany, England and Switzerland all adopted Monetary targets.
 The goal was reduce inflation but targets missed every year except 1981 so Inflation rose, GDP dropped and large budget deficits were seen. Budget deficits would result in deficit spending to borrow monies by selling more bonds to cover the deficit gap. To borrow money while in deficit results in money printing and results in printing spirals as more and more bonds are sold with interest rate controls to cover increasing gaps. By 1985, M3 rose to 17.5%.
  1993 – Present Inflation Targets
 RBA head Ian Macfarlane’s 1998 speech highlights the next economic experiment termed Inflation Targets. New Zealand again took the lead in 1990 and led the world on the path to Inflation Targets followed by Canada in February 1991, the UK in 1992, Sweden, Finland and Australia in 1993.
 The target is the “price path with the goal to maintain price stability by anchoring Inflation over time versus price changes”. The objective would become price Inflation or simply CPI, the Consumer Price Index. Why New Zealand is because New Zealand as a leading central bank was the first to revamp CPI indices so they adopted Inflation targets in line with newly revamped CPI Indices.
 Australia defines and implements its Inflation Targets as an average rate of increase in CPI of 2% – 3% over a medium term. A medium term further defined in both Macfarlane and Stevens speeches is if Inflation has a 2 in front of it over time, Inflation is on track.
 Real Spending Growth by CPI since 1993 experienced negative Cash Balances from 1993 – 1998 then positive from 1998 – 2001 and negative 2002. From 2003 – 2008, cash balances were positive then began negative years between 2009 – 2014. Current CPI is 3% and at upper end of target.
 Upon the formal adoption of Inflation Targets in 1996, the RBA was officially recognized as an independent central bank.
                        Trade Balance
 Since 1980, Australia as well as the United States experienced negative Current Accounts. Neither has been positive since 1980 and remained well below the all important 0 line. Over a longer horizon, Australia’s Current Account has been negative since 1959 and is now slowly approaching the 0 line. Top four export nations in the last four years in order is China, Japan, South Korea and the United States. Top four import nations are China, United States, Japan and Singapore. Top five two way trade is found between China, Japan, United States, Korea and Singapore. Iron Ore is the number one export followed by Coal, Natural Gas and Gold. Iron Ore is employed to make Steel so its obvious exports head to growing nations to build buildings, tunnels and bridges. Only since 2010 has Australia’s trade shifted to Asian nations.
                      Australia 10 Year Yield
 The most important Bond yield for Australia is the 10 year. The current 10 year average of the 10 year yield is 4.95 and its highest price seen in the last 10 years is 6.81 and lowest price was 2.68. Traditionally, as long as the 10 year Australia bond Yield is above the United States 10 year yield, AUD/USD is a long and short upon Australia yields below the United States. The current 10 year yield average for the United States 10 year bond yield is 2.72. The current Australia yield is 3.37 and 2.34 for the United States.
                Budget Years
 Australia’s Fiscal year begins July 1 – June 30. How and why budget years began in this time frame is unknown. The UK’s Fiscal year begins April 1 – March 31. One would note the many references to December throughout the text. December is almost the half year point and a popular month historically to adjust interest rates.
 FIX Price
A currency Fix price began under the early Gold Standards where a currency price was fixed by Government, bank or currency board to the Gold price. Generally the Spot rate was employed as the basis for any Fix price. Under free floating exchange rates, governments and central banks found creativity by fixing currency prices to Trade weight indices, another nation’s currency, a currency board, Trade weight baskets or free float but manage the price heavily as it trades. In Australia’s early years in the 1920’s free float, bank cartels in London negotiated the Fix price. Today, central banks employ and decide a Fix price daily based on Spot prices and usually in conjunction with its domestic banks. Australia releases its Fix price at 10:00 a.m. promptly Australia time. 

AUD and Monetary Policy

The enemy of any central bank since 1970’s interdependence is the business or any cycle that deviates from economic projections. Inflation Targeting as a policy is here to stay for the foreseeable future because to control inflation controls GDP, employment and interest rates within small channels. Its a top down approach but one that has served central banks well since the high 1970’s inflationary periods. If the yield curve is viewed as an inflation curve then Inflation Targeting has the effect to also control exchange rates within small ranges. As long as Inflation holds within projections, central banks can extend economic periods far into the future. They conquered what they sought to control since the industrial revolution and its not market friendly to volatility but it may ensure trends remain and more certain. But no policy last forever, its periodic. A note on cycles.
The United States 1982 Official Gold report reveals since the 1500’s, the gold versus paper currency standard reigns in each period about 50 years. Governments spend in excess and can’t repay paper currency debts so Gold periods reign. Once a need exists for governments to spend in excess of Gold to currency Fixes, paper currency floating becomes the order of the day. If 1971 is the beginning of floating exchange rates, 2014 marks the 43rd year.
Within 50 year periods derives market crashes such as the 1998 Russian Rouble crisis, 94 / 95 Mexican Peso and 1997 Thai Baht crisis. The 2008 United States housing collapse was a market crash.
Australia never causes nor will cause a crash rather they suffer the effects but they also are resiliently able to weather any storm. Australia’s dilemma is commodity cyclicality and negative balance of payments. Commodities cycle with economic growth and its reflected in its balance of payments. Now that the RBA has true independence, they are capable of staying ahead of any curve.
AUD as a currency is equally resilient. Many view AUD as a cousin to NZD when in fact, AUD is more a Euro than NZD. Its construction, trading ranges and possible deviations are more aligned to the Euro than NZD. As time progresses, AUD will be much more widely accepted as the currency that weathered every economic and currency storm over a 203 year period.

 Despite quite a monetary, exchange rate and nationhood journey,  Australia after 115 years since 1901 fought the hard fight and won.

   Brian Twomey, INSIDE THE CURRENCY MARKET, btwomey.com
 Sources and special thank you’s for information assistance for this article include the following: Australia National Archives, Australia Coin Museum, Australia Government Comm Law to read legislation and 1937 Royal Commission, Wallis and Campbell Reports,  Australia Parliament – House of Representatives –Inquiry into the Australian Banking Industry January 1991,  Australia Bureau of Statistics, Australia Government to read budgets and Parliament Texts, RBA, Scholars Selwyn Cornish and William Coleman regards Note Act 1920 Australia National University, RBA Bulletins Stevens and Macfarlane speeches, RBA Bulletin 2002 for TWI, Ric Battellino and Nola McMillan regards Interest Rate ceilings RBA 1989, Primeministers.naa.gov.au, captaincooksociety.com, James Cook daily writings National Library Association nla.gov.au
 United States: Tradingeconomics.com, Special special thank you to Global Financial Data, Australia Embassy Washington D.C, Center for Australian and New Zealand Studies Georgetown University Washington D.C., William Coleman University of Tasmania regards Note Issue 1920 Cato Institute Journal Washington D.C. publication date unknownBottom of Form, L, ll, , ,
scholar Larry Neal “The Financial Crisis of 1825 and the Restructuring of the British Financial System, May/ June 1998, St. Louis Fed

EUR/USD Through 24 Hour Cycle

EUR/USD 24 hour Cycle

The EUR/USD begain Fed Day, Wednesday January 28th, 2015 with an opening price Fixed and set by the ECB at 1.1344. That price formally opened American market trading for not just the Euro but for 32 currency pairs and ? 496 possible currency paired combinations. The 8:30 ECB Fix opened American currency markets since its inception in London in ? 1800’s. Its no coincidence the Fix price coincides with major American market news. The purpose was to ensure price volatility occurs to allow deals to get done at certain prices.

Markets then trade until not only the 10:00 am minor American economic news but the Gold price is Fixed for the EUR, GBP and USD by the London Market Buillion Association.

Markets again trade until the GBP Fix at 11:am. GBP/USD is most affected at this time as well as GBP/EUR, EUR/USD and all GBP pairs. The EUR/USD was Fixed at 1.1337.

At 12:00 Noon, the Fed conducts Currency Swap deals with Central banks and the Bank of Canada completes its “‘Noon Day” by Fixing its exchange rates. EUR/CAD is affected at “Noon Day”.

12:30 begins the FED exchange rate Fix. Wednesday the EUR/USD was Fixed at 1.1286.

The EUR/USD is clear again to trade until the 2:00 p.m. Bond market close. Then price becomes vulnerable until the 5:00 p.m. close.

New Zealand and Australian markets then begin trading but EUR/USD is affected only to the extent the RBA and RBNZ Fixes NZD/EUR and AUD/EUR.

EUR/USD next major event is the Beijing FIX that occurs at 9:30 am Beijing, 8:30 p.m. New York time. Beijing Fixed the EUR/USD at 1.1289.

Singapore and Kuala Lumpur next Fix the EUR/USD at 11:00 am, 10: p.m. New York time. The EUR/USD was Fixed Wednesday at 1.1283.

Manila opens 30 minutes later. The 11:30 am, 10:30 p.m.New York time Manila opening then Fixes the EUR/USD. Wednesday the Fix price was 1.1276.

30 minutes later, Jakarta and Bangkok Fixes the EUR/USD at 11:00 am, 11:00 p.m. New York. Both took the EUR/USD down to 1.1276 and the same as Manila.

Seoul is up next with the 2:00 p m, 12;00 Midnight Fix. Wednesday Seoul Fixed the EUR/USD at 1.1269.

Tokyo is next with the 3:00 p.m. Tokyo, 1:00 am New York Fix. Wednesday Tokyo Fixed the EUR/USD at 1.1274.

30 minutes later Mumbai opens and Fixes the EUR/USD at 12:00 p.m., 1:30 a.m. New York. Mumbai fixed the EUR/USD at 1.1279.

European markets open at 3:00 am New York and an advantage to EUR/USD traders because all prices worldwide are known. But trading is clear until the 5:30 am New York time Gold Fix again. Gold is again Fixed to EUR, GBP and USD.

The last major event to complete the cycle is the 11:00 a.m. London, 6:00 am New York time Libor Fix. This time prepares the remainder of the day to the 8:30 am ECB Fix. A new trading day then begins.

Brian Twomey, Inside the Currency Market, btwomey.com


History of the Currency and Gold Fix

The first formal Currency Fix in the modern day began in conjunction with the advent of not only the London Bullion Markets Association but the Gold Fix in 1919. The concurrence of both fixes would form not only the foundation to modern day markets but the 96 year tradition continues each and everyday as markets trade because the Fixes offer market reference prices. Gold is Fixed today twice daily at 6:30 am and 11:00 A.M.. . New York time in Euros, British Pounds and US dollars. The Gold Fix in each currency offers, past and present, a reference price, a trade able market rate, a basis to price other assets and market instruments and offers a means to finance world trade. More importantly, Fix prices in Gold, currency or both offers stability in markets but also offers the same trade able market rate to price other assets, to finance positions and world trade. But Gold is not the only Fix since the LBMA Fixes Silver, Platinum and Palladium.

Throughout history, the currency Fix is a price that shared either a dual relationship in relation to Gold and Silver or an adverse alliance as currency prices free floated. In Gold and Silver standard periods as was the prevailing market practice in the UK empire and Europe from the 1700’s – 1850’s, currencies were priced and remains the tradition today as GOLD/Currency ( UK ) or Silver/Currency ( Europe). When massive piles of Gold was found in Brazil in the early 1700’s and Australia, California and South Africa in the 1850’s and 1860’s, all nations shipped the Gold to the faults at the Bank of England and later processed by newly created Gold refineries. Not only was the Bank of England the conduit to Gold sales to banks but they ensured only the best Gold bars would be accepted in the market. A total of five companies would dominate but also manage the Gold Fix from 1919 to 2004 when Barclays bought the seat due to a sale by one of the founding firms. Domination of the five companies in earlier years would come to be known as the Cartel, Cartels, London Cartel. As the Bank of England relieved themselves of the Gold responsibility, the London Buillion Markets Association was formed in 1987.The Gold Fix was born but a birth that maintained a fixed exchange rate organization due from Gold Standard Systems.

If a Gold Standard system is understood as a regulation of not only Fixed exchange rates in relation to Gold for any domestic currency and subsequent currency exchanges then Gold Standards is also the regulation of a fixed price level and money supply system for any nation. The system maintained economic stability from the 1880’s to WW1 in 1914. The United States fixed Gold in US Dollars at 20.67 in 1834, formally adopted Gold as a standard by the Gold Standard Act of 1900 and raised the Fix price to $35 per ounce in 1933. The UK Fixed Gold at 3.17 oer ounce. WW1 saw a breakdown of the system particularly as it related to trade from the US and UK perspectives.

Both the US and the UK experienced trade deficits or an outflow of Gold as their Gold reserves were exchanged for currencies. This caused the UK to suspend the Gold Standard from 1914 – 1925 and a permanent suspension in 1931. Many nations were affected due because of the Pegged exchange rate many shared with GBP. South Africa, Canada, New Zealand, Egypt, India, Australia are the few notables including Japan when the Bank of Japan Fixed JPY to GBP/JPY from the 1920’s – 1930’s. All currencies except JPY was known formally throughout history as South Africa Pound, Canadian Pound, Australia, New Zealand and Egytian Pound. All were fixed to GBP. Egypt still retains its formal name as Egyptian Pound and was fixed to GBP at 0.975. The US maintained the largest stockpile of Gold so wasn’t affected as badly as the UK.

While Gold still maintained the daily Fix from 1919, the currency breakdown was seen throughout the 1920’s as exchange rates on any given day experienced 500, 1000, 1500 and even 2000 pip daily price changes.The factor that caused such volatility was known as the :Par Exchange Rate”. If US Gold was Fixed at $20.67 per ounce and GBP at 3.17 or 10.5 per ounce then the Par Exchange Rate for GBP/USD was Fixed at 4.8379. If a currency such as AUD/USD at 1919 prices is offered then AUD/USD was priced at 2.3790 and its value at two times didn’t equate to 1 GBP. Further, AUD/GBP was quoted in 1919 prices at 0.4980 or 2.0090 GBP and far less than the stated Gold /GBP Fix at 3.17. AUD/GBP reached a 1920 high of 0.5235 or 1.9102 GBP’s. Enormous volatility occurred due to various Fix prices between and among currencies, price imbalances from the Fix and a demand vs supply issue when economic trade is factored into the equations.

Gold and Currencies share an alliance when the world standard is focused on economic stability to maintain fixed money supplies and price levels. All are fixed. But a new system emerged particularly, because the Gold Fix was suspended from 1939 – 1954, where currencies were pegged to each other or Pegged to a reserve currency. The US Dollar was the preeminemt Peg for most nations, GBP secondary. This new system began in the 1930’s as exchange rates barely saw a 10 pip movement on any given day and formalized as the Bretton Woods system in 1944. A 1% Band plus or minus was instituted for exchange rate movements and held perfectly until the free float in 1971. Further, nations such as France and Germany left the Gold Standard in 1936 so assisted this new periodic change.

When currency prices free floated, Gold and Currency prices completely separated. The Gold Fix remained as the normal daily Gold Fix as XAU/USD, XAU/GBP and XAU/EUR and all traveled one way while currency prices traveled another way. The Gold Fix price became a market risk measure Vs its currency counterpart pairs. From an economic perspective, Gold and currencies separate when nations agree to inflate money supplies and allow the free float demand and supply of markets to determine its price.

The currency Fix price had to factor as a separate financial instrument so nations instituted either Banking Associations or central banks directly determined a daily Fix price for not only their own currencies but a whole slate of currencies pertinent to that particular nation in trade terms or by use of Trade Weight Indices for G10 nations. The New Zealand Central Bank for example Fixes 17 currencies as NZD/other currency. The European Banking Federation manages bid and ask Fix prices but allows the ECB to calculate and report Fix prices for 23 currencies as EUR/Other Currency. The RBI in India calculates its own exchange rates. The Financial Markets Department in the BOJ calculates and releases Fix prices for USD/JPY, EUR/USD and EUR/JPY. Every nation is different and most important is no two nations are the same.

Fix prices are released at different times each day. The EUR/USD for example is Fixed 10 times per 24 hour trading cycle and 11 times if the US close is factored. Luckily for the EUR, Kuala Lumpur and Singapore as well as Jakarta and Bangkok are always Fixed together or two additional Fix prices would add to the list. Tokyo Fixes its currency prices after Japan market closes at 3 P.M.Tokyo to price its currencies in perfect time for European market openings at 7 A.M. Frankfurt or 2 A.M. New York. Seoul Fixes its currencies at 2 P.M. Seoul or 6 A.M Frankfurt but always before Tokyo so a daily battle ensues between Tokyo and Seoul to allow the respective Fix price to occur conducive to Tokyo or Seoul. Because Tokyo Fixes occur after Seoul, Tokyo always wins unless Tokyo is on holiday. Some nations win, others lose in the currency Fix price matrix due to times respective markets open and close, relationship to other nations and its geography in the market cycle.

What exist today as the Currency Fix is the result of not only a coordinated price that exist from central bank to central bank but hardly a deviance exist in the prices. The reason for cooperation is because Fix prices are set in small channels and it holds the currency price in small ranges from market to market. Its like the Bretton Woods 1% fluctuation band. If currency wars truly existed such as what occurred in the 1930’s to outright destroy another nation’s currency then central banks would fight harder for an acceptable price. Instead, cooperation exists, not collussion but cooperation since formulas to calculate Fix prices reveal small movements from market to market. The only manner to argue currency wars is if large price swings are seen market to market. The currency war would then become a true price war. More importantly, not until the 1980’s and the January 1986 introduction of Libor did the world realize that exchange rates must be viewed as an interest rate.

A Total of 10 currencies were fixed in London known then as British Bankers Association Libor. It was the world standard Fix price as the premiere trade able market rate. From Libor developed currency swaps, Forwards, options European and American, Barrier Options, renewed interest in Eurodollars, yield curves, bonds, ETF’s, Futures, repos, Commercial paper and pure interest rate instruments.The list of financial instruments that developed from the Fix comprises a whole host of instruments with an interest rate focus. Its quite the opposite to what the Gold Fix was about just a few years prior. But then markets began to develop the same instruments but for a longer term. Currency Forwards, Swaps, Eurodollars are viewed and traded 10 and 20 years out, Bonds and Yields for 30.

From the Libor Scandal, five nations refuse to participate in Libor any longer. Those currencies are CAD, SEK, DKK, AUD and NZD. While five nations remain due to importance of monetary policy to Libor such as USD, JPY, CHF, GBP and EUR. What central banks realized is currency Fixes facilitates easier by use of its own internal interest rates. Libor factored to the currency may experience 1000, 1500 or even 2000 pip ranges. By elimination of Libor, central banks manage exchange rates in shorter ranges. A pegged exchange rate to a small central parity band such as DKK eliminates the need for Libor. For central banks. its all about the management of exchange rates in relation to their own economic systems.

Many nations don’t participate in Libor such as India and most Asian nations because their markets are closed by the Libor Fix.Japan qualified itself long ago as its foray to Western markets when it participated in the Gold Fix and later pegged to GBP/JPY. The Japanese London connection remains strong and viable today. Due to lack of Libor participation, nations then relied on overnight rates as either a Libor replacement or as an exchange rate management tool to hold the exchange rate price in place while respective markets are closed. Again, its a time factor to consider. A nation such as CAD benefits from US markets because of the exact times both respective markets are open while other nations rely on the tools available. Focus on overnight rates began with introduction of the Euro as European nations turned from Libor to Eonia as their guiding overnight rate. Because world markets and nations in particular operate on cooperation and the copy cat syndrome, use and focus on overnight rates gew for all nations from Euro’s beginnings and flourished. As markets truly went global, banks employed overnight rates to remain competitive in other markets when their own markets were closed.

Today’s exchange rate focus in terms of the Fix price is the race to the bottom. The goal of every central bank is to lower interest and exchange rates and price levels to its lowest common denominator without exploding money supplies. Its a central bank management system and a goal that can’t be fought despite its deviation from fixed price levels, money supplies and exchange rates from prior periods. The success if seen will appear in rising Inflation levels later. Then exchange rates begin a race to the top.

The currency and Gold Fix price is a 96 year daily tradition and the heart of all markets and in all nations on every continent. If a nation has a currency, it has a Fix price. Its a tradition that will never leave markets nor will we see a diminution of its use. Fixes allow exchange rate stability and a basis for cross border economics to flourish as well for daily traders to participate in the currncy markets.

Published FX Trader Magazine

Brian Twomey, Inside the Currency Market, btwomey.com, twbrian.wordpress.com

Thank you LBMA to assist in historic information.

10 and 2 Year Yields

EUR/USD Vs German Yields 10’s and 2’s and USD 10’s and 2’s

The USD 2 year yield currently trades in a larger range between 1.671- 0.395, both encompass the 5 and 10 year averages at both range extremes. The current price at 0.54 sits just above the 1 year average at 0.537 while below is the 2 year average at 0.445. Both the 1 and 2 year averages crossed above the 5 year at 0.39 so within the larger 10 and 5 year range is found the 1 and 2 year averages. A break of the 1 year average at 0.537 would see a range between 0.537 – 0.445 just below at the 2 year. If price remains above the 1 year average then the range becomes 0.537 – 1.6717.

The targets for all averages reveal the 2 year will remain rangebound as the 10 year average is middle bound in its range while the 2 and 5 year averages are approaching overbought. The 1 year average is not only oversold but if price holds above then its a trend just beginning. The targets start at 0.543, 0.555, 0.604 and 0.650. The correlations in the 2 year Vs EUR/USD remain negative throughout all averages and a correlational break is not seen anytime soon.

German 2 Year Yield

The current price at -0.194 trades just below the 1 year average at -0.108, next above is the 2 year average at 0.02, the 5 year at 0.33 and 10 year at 1.57. The wider regression range in the 1 year Vs EUR/USD is found between a top at 0.15 and bottom -0.209. To offer context to the topside range, the 2 year at the 10 year average targets + 0.023 but that target assumes the 2 year average breaks at 0.020. Its not likely to see positive yields unless the ECB eliminates its negative interest rate policy, adopted since September 2014. Further, targets from the 1 – 5 year averages all reveal yields remain negative. The targets from the 1 year are located at -0.21, 2 year at -0.13 and 5 year at -0.196.

The current EUR/USD rise is directly attributable to not only prior oversold yields from the 1 – 10 year averages but the correlations in the 1 and 2 year averages assisted in EUR/USD prices. The oversold yield condition is now relieved and current correlations however in the 1 and 2 year averages are at peaks which means EUR/USD will struggle to go higher from the German perspective but USD yields offer a different scenario.

USD 10 Year Yield

The 10 year yield offers averages from 10 – 1 year at 3.19, 2.35, 2.43 and 2.20. A crossover ocurred at the misaligned 2 year average as its position is above the 5 year. The current 10 year yield at 2.14 still remains below all averages with a must break at 2.20 to see a range between 2.20 – 2.35. Despite positive correlations Vs EUR/USD, targets from 1 – 10 year averages reveal significant breaks at 2.20 are not ready to be seen. The targets from the 10 year are located at 2.15, 1.81, 2.11 and 1.92.

German 10 Year Yield

The 10 year averages from 10 – 1 year align as 2.69, 1.71, 1.17 and 0.68. Targets from 10 – 1 year are located at 1.52, 0.94, 0.60 and 0.33 at the 1 year. Again correlations are positive vs EUR/USD.

Yield Spreads

From averages 10 to 2 year, German spreads are found at 1.52 and 2.01 from the 10 – 1 year. USD from 10 – 2 year averages are located at 0.76 and 0.99 from 10 – 1 year. From current market perspectives, the USD 10 to 2 spread is found at 1.63 vs German spreads at 0.47. The 10 year to 3 month from the USD side is 2.16 Vs 0.28 from Germany, a favorable USD condition. But 10 to 3 month views normally reveal the domestic interest rate or at least a proximity. Current Fed Funds just achieved its Effective rate at 0.13 on April 13 and has only closed below 2 times since.


While the USD 2 year remains negative and German 2 year positive, EUR/USD correlations remains positive and quite healthy at both 10 year yields. Typically, positive correlations is a condition that normally doesn’t hold for long periods particularly as we see EUR/USD yearly volatilities at just over 3%. Trends and trends with power normally see higher volatilities. At EUR/USD 3% is quite low.


From current 1.1400, next vital points above are found at 1.1422, 1.1451, 1.1502,1.1559, 1.1597, 1.1618 and 1.1658. Shorts must see breaks lower at 1.1399, 1.1347, 1.1306 and 1.1293. The most significant EUR/USD point is found at 1.1293, a rising line. A break of 1.1293 targets next levels at 1.1242, 1.1240 and further down at 1.1063, 1.1047 and 1.1038. Current EUR/USD prices are driven by oversold intermediate averages. Longer term averages are middle range to overbought and achieve more overbought with further prices rises.

Published Investing.com, while ago,

Brian Twomey, Inside the Currency Market, btwomey.com


EUR/USD and ECB Policy

When the ECB cut the Deposit rate for a second time September 2014 to negatove 0.20 from positive 0.10, the EUR/USD price was located at about 1.3179 and at that juncture, it already broke the 5 and 10 year averages in the 1.3200 and 1.3300’s. December 2014, the EUR/USD would travel further to break below the 14 and 16 year averages at 1.2550 and 1.2235. But January 2015 was the big month for the Euro as its descent would see every average break from 16 to 62 years. Viewed in this context, one would understand why the EUR/USD lacked any meaningful correction.

The current EUR/USD price trades around its 60 and 61.6 year averages at 1.1102 and 1.1119. Both averages encompass 720 and 740 months of data and dates to 1953. The EUR/USD exchange rates are theoretical yet accurate because they were derived from Deutschmark exchange rates iterated from the XEU basket into ECU units. Not only is the 60 and 61 year averages resistance towards any EUR/USD recovery higher but the 55 and 50 year averages are located at 1.1214 and 1.1372. Factor into the equation the historic mid point from the 1.5769 highs to the 0.6535 lows at 1.1152, the 1.1095 mid point of the 1st and 3rd Quartile, the geometric mean at 1.0966, the 62 year Median at 1.0863 and the EUR/USD is in a massive downtrend that could possibly last for years. Its not necessarily a Fed Funds hike that would lend impetus to the downtrend although that would assist but the EUR/USD from the 62 year perspective by itself is at its historic statistical price peak. Its not the averages alone, the EUR/USD from a curve perspective is at the top of the peak.

For a currency price to break a 50 year average is quite unnatural in modern day currency markets and possibly a development rarely, if ever, seen historically. Editorially, a 50 year average break is my first experience and not seen in all my research and trading years. Typically in the best of volatile markets, currency prices trade between 1 and at the most 35 -40 year averages although 40 is quite a price stretch and extraordinary. What lends credence to such an historic break is the factor of the negative deposit rate which in itself is quite rare yet it was known and planned by the ECB based on an early 1900’s German economist by the name of Silvio Gesell, a German by name who resided in Argentina, retired in Switzerland, was ripped apart by Keynes in the General Theory but recognized and praised by Irving Fisher.

Under current account surpluses at Euro 20 billion February V 19.5 billion January and 7.5 billion February 2014, the only manner for the ECB to experience a lower exchange rate was to go negative on the deposit rate since surpluses held the deposit rate in positive territory. If ever that rate approached negative, it was rescued by the ECB but the EUR/USD price was also redeemed. By going negative, the ECB was able to channel money away from paying negative interest to banks excess reserves and force bank to bank lending in the private market. The negative deposit rate was the catalyst that saw the EUR/USD crash through all its major averages in a 3473 pip run in 12 months and a break of its 10 month historic trend average. Factored as a whole, the trend however is only 7 months old or 167 days if calculated from the September interest rate drop and a 740 pip per year average drop since the 2008 crash factored from the 1.57 highs.

Not only is the lower exchange rate the target but economically GDP must be the first focus and not CPI. From a Keynesian perspective and viewed from the old IS/LM equilibrium Models, the antecedent to Taylor Rules, the lower the interest and exchange rate, the higher goes GDP as the equilibrium curve shifts. Since the September announcement to lower the deposit rate to negative, GDP has held steady between 0.2 and current 0.3 but hasn’t been negative since Q1 2013 yet 0.3 is consistent with its long run average at 0.35. Household expenditures contributed 0.2% Q4 2014 yet Spain and Germany were both the only contributing factors at 0.7 each and France 0.1 against the vast majority of negative for the remainder of European nations. Without Spain and Germany’s collaboration, GDP could’ve been much lower. Viewed annually, GDP 0.3 is well below its yearly growth rate of 0.9 yet barely above its historic mean since 2000. Since 2008, GDP annualized spent a vast majority of its life in negative territory.

GDP for the Eurozone before the crisis and since Euro inception remained positive and healthy as it ranged above 0 to 1.5 but since the crisis, GDP has remained depressed.

Further, credit growth for March 2015 to residents was 0.4%, 0 previous and negative 0.2% annualized yet negative 0.5 February. The growth rate of short term deposits other than overnight deposits was negative 3.3% March 2015, negative 3.2% February

The focus on CPI as a factor of the lower exchange and interest rate lost its concentration as it was immobilized by the adoption of QE and a rising money supply. M1 increased 10% March 2015, up from 9.1% February but comprehensively M2 rose from 9,500,000 October 2014 to current 9,754,416. Overall, as money supplies rise, CPI remains depressed. The component contributing to the negative 0.1% annualized Inflation rate is rising commodity prices as food Inflation rose to 0.3% from previous 0.1%. But Core Inflation has been negative since Q4 2014. Draghi’s recent press conference mention to take a harder look at CPI was articulated for good reason.

The recent central bank obsession with CPI is due to QE programs. Generally, as money supplies and velocities grow due from QE, CPI has a tendency to remain depressed. A gap is created between low CPI and money supply growth. Japan’s M2 money supplies and BOJ balance sheets has been rising on a beautiful trend line since 2008 but GDP growth rates ran 50 / 50 as 14 positive quarters were reported Vs 13 negative. Core Inflation was positive all 2014 but mostly negative since 2008. The BOE’s balance sheet as well as M2 has been rising since 2008 while Core Inflation dropped to 1% current since it peaked in 2011. M2 in the Eurozone resembles Japan as both rose on a skyrocket trend line while the ECB;s balance sheet dropped from 2012 but is heading hgher as QE progresses. The risk to Inflation Vs money supply growth is hyperinflation or deflation and is seen in the overall price level. One surprise tradgedy in the world can spiral prices out of control and resigns central banks to crisis management. Just as imporatant is the monitor of CPI due because QE is a new program and monetary policy has lags, generally 6 – 9 months. Within the confines of CPI and money velocity is found the work of Gesell.

The Euro and Europe had possibilities because to lower the deposit and exchange rate would provide a powerful economic base to produce terrific economic growth in the future despite the negative economic effects short term that would be seen in fundmamentals and yields. Prices, GDP, interest and exchange rates would all bottom and trend higher for many years but then the ECB acquiesced in the sledge hammer policy in QE. Where QE is seen predominately is in the Deposit rate as rising money supplies depresses interest rates. This situation affirms cheap money.

The deposit rate or Eonia, Europe’s Overnight rate has been positive in only 29 of the last 167 days since September’s announcement to go negative and those 29 days were found in the beginning of September. Every average dating from 1 year to 1715 trading days or 7 years out and constructed based on 250 trading days for each average reveals not only a downward trend in its infancy but not one average of the 7 is overbought. Further averages from 20 to 100 days also reveals a trend in development and not overbought. Every target in each average ensures Eonia remains negative for a long time in the future. Median Lines as well for all averages affirms Eonia remains negative. For Eonia to turn positive from current -0.027, the 1 year average must break at 0.007. If money supplies rise and QE remains then Eonia continues as policy to affirm negative for longer.

For EUR/USD, the next averages above the 50 year is the 45 year average at 1.1577, 40 year 1.1689, 35 year 1.1628, 30 year 1.1977 then 25 and 20 at 1.2253 and 1.2202. The most important point is the 50 year at 1.1372. A break in the opposite direction would be an important development however higher exchange rates is not what the ECB wishes nor is economics on track yet to warrant a higher exchange rate. The GDP target is predicated on a lower EURO but not a Euro that gets ahead of itself. A higher exchange rate is actually paradoxical to the current QE and negative interest rate policy. The targets are many and begin at 1.0703, 1.0513, 1.0326 then targets range from 0.9721 and 0.9791 to the lowest current points at 0.9372 and 0.9376. Despite a 3400 pip run over 12 months, the EUR is in quite a different location than has ever been known since 1998. For a major currency to run 3400 pips in 12 months is quite a statement.

Thr risks to a short Euro and the ECB strategy is the FED. Fed Funds effective at the last Fed meeting was 0.13 and rose from 0.10 since the last meeting. Before Yellen can raise, Fed Funds Effective must travel higher to an acceptable Fed level so the next raise is supported by a higher Effective rate. The point at 0.13 just graduated to this new level April 13 to offer context. Possibly a hike comes when Fed Funds passes 0.15 and heads to near 0.20. Either way, the short EUR trade remains.

Published in FX Trader Magazine Website

Brian Twomey, Inside the Currency Market, btwomey.com, twbrian.wordpress.com



Reserve Bank of New Zealand Rate Decision

A Preview

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate new-zealand-economy

Looking at economic factors

While markets prepare again for another RBNZ decision with speculation of a cut, a number of economic factors are working in favor and against a decrease. The 90 day Bank Bill and Overnight rate are correctly positioned, New Zealand’s House Price Index Q V Q is running above 1year, 5 and 96 month averages and is currently at the highest levels in 31 months, while annual averages trade above a long-term trend line dating to December 1990, but remain below the 1 and 5 year averages.

Mortgage interest rates however are at the highest levels while two year Fixed Rate Mortgages are bumping against 1 and 5 year averages. CPI and NZD exchange rates Real and Nominal on a Trade Weight basis are all severely below trend. Below trend CPI is not the factor of Petrol – although it assisted – but rather trends are found in the Inflation Tradables and Non Tradables. Tradables are the current driving force to lower OCR or remain on hold despite Real GDP at above trend growth.

Economies commonalities

GDP above current growth rates is found the commonality in all central banks and in all economies. Current Real GDP annual averages in New Zealand, Europe, US, and the UK are all running above long term trends while Australia is bumping against 1 year averages. Japan just lifted off from zero growth to achieve above trend readings. For New Zealand to sustain GDP growth, the relationship between tradables and non tradables must meld in relation to export prices and exchange rate levels.

The RBNZ highlighted both aspects in the April 30 Statement. Current export prices for an export-oriented economy as New Zealand are at a severe disadvantage in relation to the exchange rate. Before export prices and exchange rates settle however Inflation Tradables Vs Non Tradables must be addressed first because that is where is found prices and demand within New Zealand. If the Tradable and Non Tradable relationship deviates further to cause weak demand in New Zealand then the RBNZ faces a must cut situation to spur growth. Both relationships, Export Prices Vs Exchange rates and Tradables Vs Non Tradables, are a polemic but in the short to medium term and not yet a cause to lower OCR for the next quarter especially when the 90 Day rate is correctly positioned.

The new growth approach of Central Banks

What is obvious from the masses of data under constant review is many central banks are no longer working in post 2008 crisis mode. A new phase of growth and repair is the new norm. The current changes are slow yet structural and will take a few quarters since most economies were hit exorbitantly hard. New Zealand is no different in this regard as OCR was 8.25 at crisis time and dropped to 2.50 lows.

For the past 7 years, central banks operated in defensive mode and adopted questionable policies to hold economies from collapse but no longer since growth and the future is the new priority. In markets, structural changes are seen in rotations from bond safety exodus to risk on equities and other risk financial instruments. Why focus on New Zealand and the RBNZ? Because both always either lead the way towards recovery or signal downturns long in advance. Despite OCR 2.50 lows as an example, the RBNZ hiked already three times and all occurred in 2014.

Overnight Vs 90 Day Rates

The Overnight rate trades between short to intermediate averages between 3.35 – 2.69 while the 90-day in the same time frame trades between 3.62 and 2.97. The overnight rate encompasses averages from 1 year to 30 beginning at 3.35, 2.69, 4.44, 5.51, 6.02 (25Y) and 7.89. Targets for the Overnight rate range from 1 year to 30 beginning at 3.49, 3.06, 2.09, 2.92, 3.22 and 2.70. The 90-day averages in the same time frames range from 3.62, 2.97, 4.75, 5.71, 6.26 and 13.65 for the 30 year. Targets begin at 3.53, 3.35, 2.34, 3.47, 3.66 and undetermined for the 30 year.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate, 90 day rate

Targets are inflection points yet guides and vital to align the entire 30 year distributions in present views. The 5 year average for both the Overnight and 90 day Rate is misaligned and should be much higher. The 90 day rate is comfortable within the 3.62 – 2.97 range. If an adjustable OCR cut lower is needed from 3.50 then the range sustains. An OCR move lower, evidenced by positions of the Overnight and 90 day rate, would be corrective as longer term averages become oversold. Further, from the three rate hikes in 2014, any move lower is temporay and corrective as the trend in OCR is higher over time. Where the 90 day should be located based on Knut Wiksell’s Neutral Interest rate principles is above 3.62 so a higher range between 3.62 – 4.75 would serve the perfect economic range at least short term. Wiksell’s actual principles is the 90 day rate should be above the 20 year average at 5.71 to then range between 5.71 and the 25 year average at 6.26. An interest rate above the 20 year average is an economy in good equilibrium.

10 and 2 Year Yield, and 10 Vs 2’s Spread

10 year averages from 1- 30 years align as 3.87, 4.35, 5.11, 5.88, 6.47 and 7.91. Targets from 1 – 30 years include 3.44, 3.60, 4.13, 4.72, 4.67 and 4.24. From either the last monthly average April 2015 at 3.25 or the daily close at 3.76, current price trades below all averages with focus on higher prices due to oversold yields longer term. The current monthly average at 3.25 is the lowest reported average in five years and the current range lies between 3.25 and highs at 5.82, seen 53 months ago or 4.41 years.

2 Year averages from 1 – 30 years align as 2.99, 3.26, 4.75, 5.71, 6.48 and 349 months or 29.08 years factors to 7.98. The noted point is 13 data points were missing in the RBNZ series from November 2014 – November 2013. Reported averages are close but not accurate. The last traded close price was 3.06 and last monthly average was 3.12. Why the 2 year average is due to its introduction to coincide with NZD free float in March 1985 as opposed to the 1 year average with more data points missing and introduced June 1987.

10 Vs 2 Year Spread. An imperative to understand NZ markets is the 10 – 2 spread. The current price at 0.61 trades between 1 and 2 year averages at 0.46 – 0.88. A break of 0.88 targets the range between the 2 and 5 (57 months) year average from 0.88 – 1.16. The 5 year average is oversold while the 1 and 2 year average is middle range in its price structure. The 1 year targets 0.69, 2 year 0.41 and 5 year 0.72. If a price break lower occurs in the 1 year average then focus falls to 0.22, the last monthly average. Targets then become 0.23, 0.41 and 0.72. What changes is the 1 year target price.

In interest rate terms, no dramatic moves are seen however the bias is higher prices but on a slow and gradual path. When the RBNZ last embarked on its three rate rise cycle, interest rates were literally on the floor. What determines how far and how fast yields and interest rates move is pending economics.


New Zealand’s GDP grew 0.8 in the last 2014 quarter or 3.2 annualized. In terms of annual averages alone, the figure is actually 3.3. Based on annual averages dating to Q1 1990 and rescaled to 1,5 and 10 year averages, the 1 year average is found at 2.51, 5 year at 2.68 and 10 year at 2.57. The targets from 1 – 10 years are 2.84, 4.49 and 4.62. From current 3.3 or 3.2, the 1 year average is overbought yet the current 3.3 projection is above all annualized averages. A drop in GDP is corrective unless 2.51 breaks lower yet the bias is higher.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate New Zealand GDP

To offer comparative context and rescaled to the same methodology, AUD annual GDP projections are found at 2.7 with a 1 year average at 2.85, 5 year at 3.00 and 10 year at 3.09. The 1 year average is key for AUD as the targets based on 2.7 and below the 1 year average is 2.24, 2.21 for the 5 year and 1.8 for the 10 year. USD at current 2.4 GDP annualized is above the 1 and 5 year averages at 2.19 and 2.00 yet 2.4 is bumping against the 10 year average at 2.47. Targets are 2.4, 3.6 and 0.8 for the 10 year. Above 2.47, target becomes 4.12.

USD in GDP terms reveals a trend just beginning unless 2.19 breaks lower in which case a Fed Funds rise would become questionable unless a weird quirk is seen in a particular quarter. The UK from 2.8 GDP annualized reveals 1, 5 and 10 year averages at 1.54, 1.88 and 1.95 with targets at 2.32, 3.83 and 3.74. For the UK, 2.8 annualized is the highest level seen in many, many years. Japan is highly questionable as the recently reported GDP 0.6 quarterly or 2.4 annualized sky-rocked above 1,5 and 10 year averages at 1.19, 0.89 and 1.20. The annualized point at 2.4 is the highest level in Japan for many years. The targets from 2.4 are 1.83, 2.88 and 3.25. From 0.6, the 1 year target becomes 0.55. New Zealand GDP is currently routpacing its counterparts.


Annual CPI averages from Q1 2015 to Q1 1990 and again rescaled to 1,5 and 10 year averages reveal the 1 year average at 1.025, 5 year at 2.42 and 2.41 for the 10 year. As an economic release from current 0.1 and down from 0.8, all averages are way oversold therefore targets from 1 – 10 year include 0.60, 1.29 and 1.13. The point at 0.1 is a historic low, never before seen in New Zealand since 1990. CPI Q Vs Q from March 15 – September 1989 and rescaled again reveals the 1 year average at 0.2, the 5 year at 0.59 and 10 year at 0.58. March 2015 reported minus 0.3 and minus 0.2 previous. Only 12 quarters reported negative CPI and 7 of those negative quarters were derived since the 2008 crisis. CPI minus Petrol Q V Q reported 0.3 March 2015 and 0.1 previous. The 1 and 5 year averages rescaled are 0.28 and 0.56. Current 0.3 is above the 1 year but below the 5 year average yet current 0.3 was seen 10 times in the last 13 quarters. Petrol is not the driving force behind CPI.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate New Zealand CPI inflation

Tradables vs Non-Tradables

Definition: Goods and Services that enter international trade and satisfy the Law of One Price are defined as a tradable. It is a measure of traded industrial output in terms of Imports and Exports and domestic produced goods. Non-tradables are domestic produced goods based on supply/demand factors but not slated to export such as land, a toaster.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate, inflation

The Law of One Price also defines Purchasing Power Parities to answer the question “does Tradable widget A sell for the same price in Asia as Europe and America?”. The RBNZ mentioned this point in the April statement as they are watching closely the price of Tradables in various markets.

Since exchange rates such as NZD/USD are falling, the RBNZ must take into account future export prices because tradables contribute to GDP yet are calculated in CPI by each economic sector operating in the larger economy. Tradables should remain stable or rising to increase output and revenues in exports, while Non-Tradables should fall, a buy-low sell-high scenario of exported goods. Generally when Non-Tradables exceed Tradables, a weak demand problem exists economically and could easily be cause to lower OCR to again generate GDP growth.

New Zealand’s Non-Tradables prices have been higher than Tradables for the past 6 quarters. Twice in the past 12 quarters have Tradables been higher than Non-Tradables. Since 1990, Tradables were negative 25 quarters while Non-Tradables remained positive, a mixed matched relationship and a persistent conundrum for New Zealand.

Import Vs Export Prices, Current Account

The incessant problem in Tradables is further seen in Export Vs Import prices. Import prices were negative every year for the past 12 years while Export prices were negative in 8 of the last 12 years in terms of annual averages dating to 1990 and 1989. Part of the disjunction may be Export demand related to seasonality of New Zealand’s commodities, such as Milk and / or level of exchange rates.

Academic literature would define this phenomenon as Exchange Rate Pass Through where the exchange rate level is not producing desired results in Import or Export terms. No mystery why the RNBZ recently began to voice concerns in exchange rate levels since Imports and Exports has an equal weight to produced goods as much as repatriations home. Further, New Zealand Current Account as a % of GDP has been negative every year since 1970 except for 1972 and 1973.

Home Prices

New Zealand’s Home Price Index Q V Q at 2.6 is nearly the highest price last seen 6 and 7 quarters ago at 3.0 and 2.9. When last prices of this magnitude were reported was 31 quarters or 7.5 years. Averages from 1, 5 and dating to December 1990 reveal 1.79, 1.63 and 1.44. Not only are prices above all averages but targets reveal the Home Price Index remains high. The targets from 1 – 10 year averages include 2.54, 3.69 and 3.39. An annual view reveals the Home Price Index at 6.3 from March 2015. Contextually, 6.3 is below rescaled averages at 6.8, 6.69 but above 5.93.

Mortgage Interest and 2 Year Fixed Rates

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate New Zealand Mortgage interest rates

The RBNZ recently introduced Loan restrictions to include 20% – 35% down-payment for home dwellings. As noted above, New Zealand’s Home market is volatile but most volatile in Auckland. Current 6.6 Mortgage interest is at the highest levels, last seen 74 months ago or 6.16 years. With the combination of loan restrictions and a correction in home prices expected, banks are intently competing to lower Mortgage and Fixed Rate interest. The 2 year Fixed Rate is now hovering just above 5.0. The 6.6 point remained the constant monthly average for 8 months. Based on monthly averages, the 1 year average is located at 6.41, 5 year at 6.03, 10 year at 7.45 and 20 year 7.52. The 2 year Fixed rate at 6.0 accompanies the 1 year average at 6.20, 5 year at 6.12, 10 year 7.07 and 20 year 7.21.

Exchange Rate Trade Weight Index

As Tradables are understood as internal demand and productive capacities, the exchange rate is the final arbiter to the export price, price to sell and profit generated. The Trade Weight Index level weighs heavily on every OCR decision because NZD is indexed to the exchange rates of major trade partners as a measure of its goods and services.

Purchasing Power Parities is defined as a current indexed exchange rate price of goods and services to answer which trade partner nations to sell Milk and widgets, where profits generate and which nation to exclude. If NZD/KRW in Korea has an exchange rate disjunction in relation to shipment and Milk profits then possibly Canada and NZD/CAD will purchase Milk since the exchange rate is conducive to shipment and profits.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate New Zealand exchange rate

OCR levels are as much factors as export competitiveness in exchange rate trade as CPI is to internal prices and productive demand. The RBNZ maintains two TWI indices to measure exchange rates, Nominal and Real. Nominal is the daily rate while Real TWI is the monthly average of the Nominal yet both are recorded as monthly averages.

The Nominal 1 to 16.3 year monthly averages are located at 79.04, 74.60, 72.40 and 68.36 with targets from the last 79.17 monthly average at 80.73, 78.56, 77.53 and 76.32. From current 76.05 daily rate, targets for the 1 and 10 year averages drop to 77.34 and rise to 79.53. The 5, 10 and 16.3 averages are all approaching oversold.

Real TWI from 1 – 16.2 year averages are located at 78.99, 75.47, 73.51 and 68.97. From current 77.67, targets are found at 77.07, 78.72, 78.21 and 77.72. The trade and monitor is found at the Nominal Rate. Generally as Purchasing Power Parities rise, the home currency rises as Imports are reduced. Inversely, as the currency price drops, exports increase and Purchasing Power Parities fall.

Currency correlations

As Exports to Asia is most vital to New Zealand, 5 currency pairs in the TWI are problems. Based on 1 year views, Correlational problems exist in NZD/CNY, NZD/HKD, NZD/EUR, NZD/PHP and NZD/IDR. NZD/EUR and NZD/IDR lacks a positive correlation to NZD while  NZD/CNY, NZD/HKD, NZD/PHP are at Correlational peaks. NZD/KRW is approaching peaks as well.

As the order of the current day is nations to drop exchange rates to lowest levels and lowest common denominator against each other, the future will hold a period when exports from nations will intensively compete with each other. In the end, I don’t see the RBNZ is ready nor should drop OCR.

What that means for NZD/USD is a continuation to sell rallies to next point at 0.6912.

Brian Twomey
author of
Inside the Currency Market: Mechanics, Valuation and Strategies
Using the Z Score to trade Foreign Exchange and Other Financial Instruments: The Step by Step


Quarterly Review: 200 Pairs, Alignments, Realignment Discussion

Quarterly Review: Positions and Alignments 200 Currency Pairs

The current review marks the 8th quarter to analyze and graph 200 currency pairs to determine what type of currency market trades in terms of Risk on / Risk off, how pairs align V each other, present and future long term trades, a view to specific pairs or regions trending and /or in flux, alignments and Realignments. Methodologically, each of the 8 G10 pairs are aligned as G10/ Other currency V 28 counterpart pairs. Each of 28 pairs are then plotted above or below long term equilibrium or inside equilibrium which means the currency pair price classifies as neutral. Major Asia pairs were plotted and MYR was included as well as TRY, RUB, ZAR, ILS, CZK, MXN, DKK and BRL. The remainder pairs include THB, SGD, HKD, CNY, AUD, NZD, CHF, USD, EUR, GBP, JPY, NOK, SEK, KRW, PLN, CAD, PHP, USD, IDR, INR, HUF
Two common themes exist this quarter. The first is 24 USD pairs as USD/ Other pair is seriously overbought. Secondly, all cross pairs, about 170, are on the verge of either major breaks higher or serious reversals will be seen. A situation in this regard verges on Realignment.

Realignments in currency markets occur based on market crashes. A Realignment is a cross pair shirft particularly seen in opposite pairs such as EUR/JPY and chosen because its by far the most widely traded of all cross pairs every year since 2000. During the Russian Rouble and Thai Bhat crisis, EUR/JPY was a JPY pair but since the crisis occurred in Asia, EUR/JPY switched allegiance to align with the Euro. The 2008 crisis classifies as a crash because EUR/JPY again switched alliance to become a JPY pair. Normal market crashes rarely see an allegiance shift to a risk on pair instead the flight to safety or risk off trade devolves into the risk off side in any opposite currency pair. The Realignment then stands to reflect all traded markets as well as the true nature of currency pairs as forward instruments and lasts until the next crash to force another wholesale market shift. Since the 1970’s free float and agreements from Plaza, Louvre and Smithsonian, crashes occured every 5- 6 years on average to cause market realignments. Crash periods were extended to 10 years from the 1987 Louvre Accords to the 1997 / 1998 Thai Bhat crisis and then from 1997 /1998 to the current 2008 period. The modern day since 1997/ 1998 has only seen two events classified as a crash. The first Thai Bhat crisis lasted about 10 years while the second 2008 crash is now seven years and ongoing. The current period still classifies as Risk off and its seen predominately in cross pairs.

The true purpose of cross pairs as opposites or not is to eliminate USD triangulations so cross pairs were classified as funding V Investment. As cross pair popularity grew, it allowed an offset pair in case of economic crisis or war that may develop in any nation. If an event occured in Europe and both EUR/USD and USD/JPY radically changed its value then importers, exporters, corporates, central banks and repatriations would employ EUR/JPY as an economic offset. Despite the European dilemma, the world still functions, markets stabilize and contagion is prevented. The true alignment of cross pairs however is ownership by the respective central bank, an impossibility yet the SNB was successful in this first ever seen movement two quarters and running.

Last quarterly review revealed the SNB owned all 27 pairs as CHF/Other Pair except outlier pair EUR/CHF. To own EUR/CHF as CHF/JPY, the 2009 SNB imposed floor at 1.2000 was vanquished. Today’s quarterly review reveals the SNB not only owns all CHF pairs but 27 pairs remain above equilibrium except CHF/HKD whose position is neutral. The Federal Reserve owns 25 pairs to include DXY and all above equilibrium except for neutral pairs USD/PHP and USD/SGD and both USD/CNY and USD/HKD whose positions are below equilibrium. The BOJ owns 20 pairs below equilibrium except RUB, TRY, ZAR, IDR, HUF and BRL. JPY/USD remains below equilibrium. JPY/NOK holds its position in neutrality today as was the case last quarter.

The RBNZ owned a vast majority of its pairs last quarter except NZD/CNY but this quarter reveals neutrality in NZD/GBP, NZD/HKD and NZD/KRW while below equilibrium pairs include NZD/CHF, NZD/CNY, NZD/ILS, NZD/PHP, NZD/SGD, NZD/THB and NZD/USD. The remainder pairs are above equilibrium. The EUR and GBP relationship generally shares a fairly even view in their currency pair lineup but this quarter the BOE owns 18 pairs above equilibrium, 8 below and GBP/CAD in its typical quarter to quarter neutral position due to wide ranges and inability to leave neutrality. The ECB owns 11 EUR pairs above equilibrium, 14 below and typical pairs EUR/CAD, EUR/CZK and EUR/AUD in neutrality. EUR/CZK owns neutrality since the 27.00 floor imposed by the CNB November 2013, EUR/CAD due to its stability quarter to quarter and EUR/AUD due to wide ranges and inability to leave neutrality.
The 11 EUR pairs above equilibrium include EUR/JPY, BRL, DKK, HUF, IDR, INR, MXN, NOK, PLN, RUB, ZAR. GBP below includes GBP/CHF, GBP/USD, GBP/CNY, GBP/HKD, GBP/KRW, GBP/SGD, GBP/THB and GBP/NZD. Both EUR/NZD and GBP/NZD share equal positions below equilibrium.

The RBA owns six pairs above equilibrium, seven in neutrality and 14 below. The six pairs above include AUD/BRL, AUD/IDR, AUD/NOK, AUD/RUB, AUD/ZAR and AUD/TRY. Neutral pairs include AUD/CZK, AUD/CAD, AUD/DKK, AUD/EUR, AUD/GBP, AUD/HUF and AUD/SEK. AUD/EUR in neutrality complements EUR/AUD’s neutral position. AUD/CAD neutrality complements CAD/AUD. The only relationship the RBA shares with the ECB from a Trade Weight perspective is found in AUD/EUR.

The BOC owns 12 pairs above equilibrium, 6 in neutrality and 10 below. Pairs above as CAD/Other pair include BRL, CZK, HUF, IDR, INR, MXN, NOK, RUB, SEK, JPY, TRY and CAD/ZAR. Neutral pairs include CAD/AUD, CAD/EUR, CAD/DKK, CAD/GBP, CAD/MYR, CAD/PLN,

Realignment regards alignment of the cross pairs. As long as EUR/USD remains below equilibrium, USD/JPY and EUR/JPY remain above then current overall Risk off markets continue. If EUR/USD and EUR/JPY break equilibrium then a new Risk on Realignment period trades. Generally Realignments take about 1 year to develop and fully implement after a crash but Realignments always occurred diue to a crash. With so many cross pairs at important break points, special attention is deserved to ask are markets positioning forward as a conviction of a Fed rate hike and can markets self realign without a crash. The EUR for example could easily see its above equilibrium pairs fall below which would reinforce more EUR shorts in the market and leave EUR/USD vulnerable to further downsides. Euro cross pairs are most important among all pairs to determine positions moving forward since EUR amd USD share an inverse relationship and designed in this regard hundreds of years ago.

As USD remains above equilibrium, the long USD trade is fine despite overbought and in need of correction yet a selloff even significant won’t see vital breaks. As Risk off CAD/ZAR remains above equilibrium, AUD/CAD in typical neutrality and EUR/USD below reinforces Risk off and Long USD. Asia pairs are most vulnerable to selloff Vs USD but also V EUR as 8 pairs aligned as EUR/ Asia are below equilibrium. CNY as Other Pair/CNY always remains below equilibrium traditionally quarter to quarter but HKD also graduates to below equilibrium Vs all pairs except CHF. The pairs to offer the most volatility is TRY, RUB, ZAR, DKK and BRL.

Brian Twomey, Inside the Currency Market, btwomey.com