Fed Funds closed yesterday at 0.13. The significance of 0.13 is this level finally broke above 0.12 on April 6 and a break of the 0.11 – 0.12 trading range. Since April 6, Fed Funds closed at 0.13 exactly 42 days in a 0.12 – 0.13 range. More significant is 0.14 was first seen June 16 and four closing days since the break. The current range then becomes 0.13 – 0.14. The trajectory of Fed Funds is higher however slow but it reveals implementation of the Overnight Reverse Repurchase Agreement and Interest on Excess Reserves facilities has been successful as Fed Funds are managed with an upward focus.
The larger Fed Funds range is found between the 5 and 10 year averages from 0.1185 – 1.4605. The next level above 1.4605 is the 15 year average at 1.81, 20 year at 2.70 and 22 year average that dates to January 1, 1992 at 2.88. Below the 5 year average is found the 2 year at 0.09 and 1 year at 0.10. A cross occurred for the first time in many years as the one year average crossed above the 2 year. Significant supports are now established but the important focus is the 5 year due because its where the Fed Dot Plots are located.
Targets for averages 1 – 22 years are located at 0.1204, 0.1119, 0.1550, Negative 0.55, Negative 0.18, + 0.37 and + 0.66 for the 22 year average. The middle section of the curve at the 10 and 15 year points are misplaced but should normalize over time as Fed Funds heads higher. The 1 and 2 year offer targets at 0.12 and 0.11 because both are overbought especially the 2 year from the 0.13 close. Longer term averages however are oversold but not to any significant degree. What is seen is a slow normalization in development stages. Eventually 0.15 will be seen and a 0.14 – 0.15 trading range.
Shorter terms from 30 – 90 days reveal averages from 0.1256, 0.1263 and 90 day at 0.1218. Targets are found at 0.1391, 0.1379 and 0.1361. All averages are oversold and correctly priced. Since Fed Funds is the Effective rate to 0.25, how high and at what levels is sufficient to see the first Fed hike remains the question. Points from 0.13 and 0.14 in my estimation is not sufficient to support a rate rise. What must be seen is a continuation of Fed Funds Effective rises over time to lend confidence in a rise in the headline rate. The Fed has 3 months to see effective rates higher to liftoff in September. For USD and DXY, higher Fed Funds is massively supported
Brian Twomey, Inside the Currency Market, btwomey.com