EUR/USD and 17 Pairs Vital Levels

RBA board member John Edwards spoke the magic words last evening in regards to negative interest rates. The risk to exchange rates are higher particularly as AUD or EUR/Other pair. The assumption is negative rates work and central banks rely solely on negative rates as a standalone policy. But this is not the case as negative rates couples to stimulus in an apples to oranges monetary policy. As a standalone policy, negative rates has potential to act as the economic rebuild over time as intended but that also means exchange rates travel light years higher, particularly in the short term. Higher exchange rates is not what central banks wish at the moment. If stimulus is added to the negative rates equation then both policies fight against each other. If Yellen is on hold then stimulus V negative rates becomes ever more crystallized and markets become ever more data dependent under a laser beam watch to the central banks for direction. Massive statistical uncertainty exists in current prices and its driven exclusively by the central banks. Stimulus and negative rates holds exchange rates in small ranges and slow price grinds. My observation is this is the intent as central banks buy time to allow data improvement, or not.

I marked vital levels below, make the moves based these price points.

EUR/USD 1.1056, 1.0883.

AUD/USD 0.7131, 0.7130.

NZD/USD 0.6614, 0.6602. Watch this pair closely as prices are set to explode.

USD/JPY, Severely oversold from 119.00 and 117.00, set to correct higher. When USD/JPY runs, it moves. Now is the time to jump.

USD/CAD 1.3744 and 1.3746, always a good moving pair, good volatility. This pair makes money.

USD/CHF 0.9908, 1.0016 and 1.0255

EUR/JPY 123.98 and 129.86

GBP/JPY 154.19, 168.48

AUD/JPY 83.79, 84.56

NZD/JPY 73.84, 76.34

AUD/CAD 0.9798, 0.9523

NZD/CAD 0.9089, 0.9075 big supports

EUR/AUD 1.5680, 1.5509, 1.5265. Good volatility,

EUR/CAD 1.5197,

EUR/GBP 0.8097, 0.7983, 0.7624, 0.7546

CAD/ZAR 11.14 and 11.09 Risk On/ Risk Off is borderline in larger market price context.

CAD/JPY 85.58

Brian Twomey Inside the Currency Market,

Fed Repo Facilities: What’s Next

The Fed’s Interest rate on Required Reserves penalty rate today is 0.50. The Fed’s Interest Rate on Excess Reserves penalty is 0.50 today. The spread between the stasis 0.38 Fed Funds rate and headline is 12 bps, 0.38 to 0.50. Libor is stagnant at 0.37 and 13 BPS to headline. The 1 month yield trades 0.28, 0.30 for the 3 month and 0.42 for the 6 month. The noted point are miniscule gaps created not only since the 2008 crisis but since the 1971 free float. Traditional central bank management functions as market facilitators were add and subtract liquidity as needed inside a full basis point and far larger gaps.

Yellen views market fluctuations as disturbances because volatility detracts from ability to manage and control the Fed Funds rate. Yellen needed guarantees to ensure a floor would be created if she raised the Fed Funds rate. She found it in the newly created 2015 program of the Overnight Reverse Repurchase Agreement and the Reverse Repurchase Agreement. Most important is the Overnight Reverse Repurchase Agreement because that rate is fixed with a purpose to “Steer the overnight rate.” Steer means hold Fed Funds and lower market rates inside small channels to protect the Fed Funds Rate. Yellen’s Monetary Policy as all central banks is stated in the favorite word mentioned constantly in Fed Minutes: Monetary Control and communicated through the guided message. Control of Fed Funds through both Repo facilities allows Yellen to reinvest the $2 trillion available in the Fed’s System Open Market Account since Repo facilities were created for Treasuries. Borrowings are also allowed at far lower rates.

The original program in the run up to raise Fed Funds was steer Fed Funds through Interest on Required Reserves and Interest on Excess Reserves. The deal was IOER provided the sell rate while IORR provided a buy rate floor inside a 5 BPS channel but all activities done below Fed Funds rates to lend support. Imagine if Yellen raised headline then market disaster struck and Fed Funds traded above Headline or a run on banks occurred. That situation is not economically good especially when Yellen raised into a questionable economy. Yellen accomplished her goals in this program as sufficient distance exists between Fed Funds and headline. Fed Funds steer was as much the object as guide monies in small channels. It explains why M1 Velocities are at historic lows and why Yellen is able to remain a holder and re investor of stimulus bond purchases.

As IORR and IOER are both at 0.50 and Fed Funds is protected, enter Overnight Reverse Repo Facility and Reverse Repo Purchase facility. ONRRP serves as the sell point at the top of the channel and its rate is fixed while the Reverse Repo serves as the floor. Today, $52 billion Treasuries went through this facility at an interest rate of 0.25. Yesterday, $34 billion went through at 0.25, Friday February 12th, $35 billion went through at 0.25. The last 25 transaction all involved Treasuries since its a %300 billion per day Treasuries only facility and traveled through at 0.25. Both facilities not only involve Yellen Treasuries but corporate and bank borrowers access far below market rates in a buy low, sell high scenario.

Further management proposals by the Fed is to reduce the cap on the ONRRP. One proposal is to widen the spread between interest on reserves and the sell rate on ONRRP. What’s obvious is the cap is going lower, how the Fed finally derives the lower cap is unknown since the current system remains in proposal stages.

The goal of ONRRP and RRP is to steer Fed Funds, money, velocities and Treasuries into the small 5 BPS channel as was the case in the IOR and IOER. What this means is creation of a lower financing rate for the Fed, banks and major companies, especially major companies. Major companies largely finance operations through both Treasuries and Fed Funds. Companies doing business across borders employ interest rate swaps.

What ONRRP means for Fed Funds is no rush to raise as long as banks and companies finance and turn profits at lower levels of interest. A rate borrowed at 0.25 can reinvest anywhere along the yield curve and not move yields. Creates stability and tales away volatility. If velocities in M1 remains low especially at current and historic 5.9 lows, Inflation over time may reach the 2% target. But the Fed speaks to Inflation in medium terms but never defined. If the economy muddles along slowly at 1 and 2% GDP without implosions then payoffs to borrowers and ONRRP financiers remains viable. What this means for markets is volatility ceases over time as interest rates compress. Globally, lower the ONRRP cap moves interest rates closer to those 6 negative interest rate nations. As negative interest rate nations are on the path towards an economic rebuild, possibly ONRRP is the United States facility to economically rebuild.

Brian Twomey, Inside the Currency Market,

USD: GDP Current and Future

USD GDP at last 0.7 or an annual growth rate of 2.8 is obviously sill quite low eight years after the crisis but what’s holding US GDP from falling into negative territory is Residential Fixed Investments and Federal Government spending. The drags in GDP is found in Private Inventory Investments, Non Residential fixed investments and Exports. As Federal Government spending in Keynesian forms remain the economic drivers, negative interest rates must feel further effects later if a savings as expected materializes since more non Americans are buying larger sized houses yet Fixed investment in non residential reveals investor confidence in future projects is low.
The lower DXY is not helping exports as Imports surpass exports by $43 billion. December Exports at the February release was $181 billion vs $224 billion in Imports. South and Central America lead the way in Imports with a surplus of $2.8 billion, UK 0.6, and Brazil 0.6 billion. In deficit nations, China clearly leads the way with $29 billion, Eurozone $13.3, Germany $6.4, Japan $6.3 and Mexico $4.8 billion. Canada recorded 1.4 deficits, India 2.0, 2.5 billion for South Korea.

GDP in current US Dollars increased by a $68 billion market value, measured as Goods and Services minus Goods and Services in productions and an increase of 1.5% to $18, 128 billion. How is the US doing? , Okay. Its the percentages in the release throwing commentators off track. The next GDP release will see higher numbers because the percentages are oversold so the current $68 billion market value will also increase. In the 3rd quarter, GDP in current dollars increased 3.3% or $146 billion. What helped was 2% rises 9 times in the last 14 releases, or approximately 3 years. The more GDP increases in percentages, the more current dollars rise. Current GDP dollars imparts the message the US is doing okay, not terrific but its muddling along on slow, slow growth paths. Its a questionable call for Yellen to continue Fed Funds raises into a low growth economy yet the same scenario holds to lower Fed Funds.

While headline Nominal was down 0.7%, Real GDP rose 2.0% and Real Gross GDP by domestic purchasers increased 1%. GDP is measured by prices of goods and services or by a quantity of goods and services. The current index is found at 16442.30 and previous 16414.00. Nominal GDP is the total value of Goods and Services produced in current dollars while real GDP is the total market value of produced goods and services measured in constant dollars. Divide Nominal by Real to get an idea where the economy stands. I measured 0.7 / 2.0 to get 0.35 or 3.5 %. Divide Nominal 0.7 by 1.0 to see 0.7. Again, the US is doing okay in Real GDP terms but the current economy is muddling along.

In percentages terms, the 1 and 2 year averages are most oversold with means at 1.93 and 1.78. Remaining averages from 2 – 10 years and dates to 1990 are not oversold. GDP 1.23 must break to go higher then GDP ranges between 1.23 – 1.78 then 1.79. Targets are found from 0.24 to 1.30 yet the 3 year average targets minus 0.36, a concerning average. Longer 7 and 10 year averages are found at 2.43 and 2.44. The averages in total are not only converging but falling lower as time progresses.

The next GDP release is going higher, it may not skyrocket but its going higher. Until Yellen rescinds desires to buy and hold bond proceeds, GDP continues to muddle through and Fed Funds raises become questionable.

Brian Twomey, Inside the Currency Market,


DXY must break 97.28 to go higher. From 1 and 2 year monthly averages, DXY is ranging between 97.28 – 91.42. The more market oriented range V EUR/USD is found between 97.28 – 94.00. DXY 97.00’s viewed from EUR/USD is found not only many resistance points from averages 1 – 10 years but anything above 97.00 is out of bounds. Good sell point in the 97.00’s and that includes all USD/Other pairs. Above 97.00 offers, 98.39, 98.41, 98.62. To see 98.00’s, EUR/USD must trade at least 1.1044 while DXY at 93.99 means EUR/USD will trade between 1.1456 – 1.1612. DXY 97.00’s resistance points 97.02, 97.23, 97.28, 97.37. Longer term DXY is oversold short term from averages 1 – 3 years and overbought from averages 5, 7 and 10 years. DXY is more overbought than is EUR/USD oversold as DXY is the driver.

Overbought in DXY and oversold in EUR/USD is especially seen in the Regression relationships. Last 2 months, DXY was at 166 Vs EUR/USD minus 34, This month, DXY is located at 152 V EUR/USD minus 50, a 16 V 14 point difference. The best both prices in DXY and EUR/USD can achieve is Minus 72 EUR/USD and DXY 1.66 – 1.36. Over time, EUR/USD could easily hit 102 and DXY 168 as averages. What this means is not only more continued ranges short term but slow slow price grinds while EUR/USD has potential to travel higher. Regression confirms pretty much a 300 range. It confirms 97- 98 DXY as top and EUR/USD bottoms for now at 1.1008, 1.0978 and 1.0932. From DXY 95.99, EUR/USD tops are located at 1.1312, 1.1336, 1.1209. The DXY V EUR/USD averages at 1 and 10 year are severely misaligned. This conundrum adds to the slow 15 point move over 1 month in the Regression line. Now maybe a good time to look further at GBP as GBP/USD is in the process of a Re Correlation to its currency pairs. GBP/AUD, GBP/NZD, GBP/CHF and GBP/JPY all Correlate in the 80 – 90% range yet most important pair GBP/CAD still fails Correlations at Negative 0.07. If GBP/USD and GBP/CAD fail then warning exists in GBP.

EUR/USD V DXY from EUR/USD 1.1225, Means and Ranges.

1 Year Mean 96.22, Range above 97.71, Below 94.72
2 Year mean 96.10, Range above 97.26, Below 94.93
3 Year Mean 95.98, Range above 97.23, Below 94.72
5 Year Mean 95.12, Range above 97.37, Below 92.86.
7 Year Mean 93.86, Range Above 96.35, Below 91.36
10 Year Mean 93.56, Range Above 96.03, Below 91.08.

EUR/USD V DXY from EUR/USD 1.1044, Means and Ranges.

1 Year Mean 97.13, Range Above 98.62, Below 95.63
2 Year mean 97.23, Range Above 98.39, Below 96.06
3 Year Mean 97.16, Range Above 98.41, Below 95.90
5 Year Mean 96.36, Range Above 98.61, Below 94.10
7 Year Mean 95.59, Range Above 97.99, Below 93.00
10 Year Mean 94.55, Range Above 97.02, Below 92.07

DXY V EUR/USD, From DXY 95.99, Means and Ranges

1 Year Mean 1.1172, Range Above 1.1336, Below 1.1008
2 Year Mean 1.0841, Range Above 1.1024, Below 1.0658
3 Year Mean 1.1122, Range Above 1.1312, Below 1.0932
5 Year Mean 1.1619, Range Above 1.1934, Below 1.1304
7 Year Mean 1.1378, Range Above 1.1755, Below 1.1001
10 Year Mean 1.0790, Range Above 1.1209, Below 1.0371

DXY V EUR/USD from DXY 93.99, Means and Ranges

1 Year mean 1.1292, Range Above 1.1456, Below 1.1128
2 Year mean 1.1161, Range Above 1.1344, Below 1.0978
3 Year Mean 1.1422, Range Above 1.1612, Below 1.1232
5 Year Mean 1.1879, Range Above 1.2194, Below 1.1564
7 Year Mean 1.1658, Range Above 1.2035, Below 1.1281.
10 Year Mean 1.1110, Range Above 1.1529, Below 1.0691.

EUR/USD Rough spots overall, sell points 1.1300’s – 1.1600’s, Below look to 1.0900’s as Long points.

DXY 97.00 – 98.00 Sell, Long 92.00 – 94.00

Brian Twomey, Inside the Currency Market,


Brian Twomey with brother Dale, Fxstreet, Live Analysis Room, Last Quadrant

Brian Twomey With Brother Dale, Fxstreet, Live Analysis Room, Currency Market Rules and Markets are changing,

Encourage all to read the Silvio Gesell Negative Interest Rate Perspectives on site here to incorporate a complete understanding what’s ahead in our markets by Negative Interest Rates. Unless Gesell is read particularly the 1891 paper then to understand negative interest rates is literally futile. This negative interest rate period is new yet revolutionary in its timing and revamp of the current Keynesian structure. Keynes is finally knocked off his long standing 2008 plateau to hopefully Rest in Peace where he belongs. I’m not sure I have a problem with Gesell’s economic approach in negative interest rates but its the 4th Quadrants of markets in the timing introduction. Implementation will take time for all CB’s to adopt, its a structural approach. Generally markets take 1 year to adjust to new changes. That means volatility will be seen for a while longer yet the massive slowdown will be seen. Let me offer what structural changes and volatility means.

From 1972 – 1979, DEM/USD saw 2 years when + 1000 pip years were seen. Those times were 1974 – 75 and 1978 – 1979. That was Gas lines and Iran hostage crisis.

1980’s were the best years in currency markets in all 45 years of the free float. The beginning 1980’s was boom economic times under Ronald Reagan. 1983 was AUD Free Float introduction. 1985 was the Plaza Accords, 1987 was Louvre that reversed Plaza two years later. DEM/USD saw 7 times of + 1000 pip years. 1980 – 1981, + 1853 pips. 1981 – 1982 saw +2014 pips. In 1983 – 1984 saw +1608 pips. 1985 – 1986 saw + 1880 pips while 1986 – 1987 and 1987 – 1988 each saw +2304 and +1352 pip years. 1988 – 1989 saw 1246 pips. 1987 was a crisis year.

1990’s. From EURO introduction 3 times saw + 1000 pip years. 1990 – 1991 saw 1572, 93 – 1994 saw 1063 and 1997 – 1998 saw 1430 pips. Years 1990 – 1991 was Iraqi War, 1994 was Mexican Peso crisis and 1997 was Russian Ruble and Thai Bhat.

1999 – 2010 saw 4 times of + 1000 pip years and 3 times in the 900 pips. Resembled the 1980’s. 1999- 2000 = 1462 pips, 2002 – 2003 = 1825 pips, 2007 – 2008 saw 1639 pips. The point in 2001 was terrorists who blew up the World Trade Center while 2007 – 2008 was Housing Crisis.

2010 to Current. This period is seriously under performing and is easily the worst decade seen in 45 years of currency trading. 2010 – 2014 saw collectively a total of 2000 pips. This is by far the lowest since the January 1972 Free Float. its unheard of in market terms to ever see an event such as this but its been recoup by Central banks in never ending crisis mode. 2014 – 2015 saw + 1702 pips while 2015 – 2016 saw 1141.

Collectively, 1970 decade = 6791 pips, 1980’s = 14,921, 1990’s = 9090, 1999 – 2010 = 12,290, 2010 – 2016 = 4850. We lost our volatility in the 2008 crisis.

Brian Twomey Inside the Currency Market,

Silvio Gesell”s Negative Interest Rate Perspectives

When Silvio Gesell an unknown German economist living in Argentina wrote the 1891 paper titled “The Reformation in Coinage as a Bridge to the Social State” and the 1906 book the “Natural Economic Order” based on his theories to revive economies and inflation by negative interest rates, he was widely criticized by John Maynard Keynes for exclusion of a liquidity preference and others yet accepted by an economist interest rate giant named Irving Fisher. If not for Irving Fisher who believed in Gesell’s negative interest rate policies, Gesell would remain today completely unknown. To understand obscurity, Gesell was mentioned 19 times since 1969 in academic papers at the American Economics Association. Less than a handful of academic papers were actually written regarding Gesell’s negative interest rate theories because he was considered a radical outside of mainstream economic thought.

Gesell was most influenced by former economists Henry George, Pierre Joseph Proudhon and Karl Marx. Gesell was vehemently opposed to Marx as outlined in deep detail in the Natural Economic Order. Why Gesell was classified as a radical was not only because George and Proudhon were radicals but all Gesell’s writings contained portions of the Stockholm, Von Mises Austrians – Classical Liberals and Socialist thought. Communists roundly rejected Gesell but because of the questionable classifications in Gesell thought, neither economic schools or academia accepted Gesell so he fell into obscurity. The Ludwig Von Mises Institute today still considers Gesell and interest rate policies as irrelevant. Another reason is nobody ever considered negative interest rates. What developed after Gesell’s writings was the formation of the German Workers Party in 1919 to “break the back of interest slavery.” and it is here where Hitler began to rise. Today, Gesell shares a renaissance as the ECB since early 2014 studied then implemented Gesell’s negative interest rate policies. Denmark, Sweden, Norway, Japan and the Swiss adopted negative interest rate policies while more central banks could be on the way. The Israeli Shekel, Bulgarian Lev and Czech Koruna are next candidates.

The word Natural in the title in my estimation is an answer from famed Swedish economist from the Stockholm School of Economics Knut Wiksell. Knut Wiksell in 1898 wrote the most groundbreaking books on positive interest rates ever written in my opinion. Wiksell’s books remain widely read today by college students, academics and market traders. Wiksell gave the world the Natural Interest Rate to understand economies measured in 20 – 50 years and the 3 month interest rate. Interest rates viewed in 20 – 50 years determines if an economy is under performing, over performing or at equilibrium. If a financial market instrument trades today, thank Knut Wiksell.

Gesell viewed interest rates as unnatural, forces hoarding and concentrations of wealth, as collusion by moneylenders and the state and distorts the medium of exchange because only moneylenders possess the power of exchange to enter and exit markets at will based on an oversupply of money. Interest rates in Gesell terms was viewed as a monetary phenomenon and incorrectly prices money because interest was seen as a toll, a strict profit motive and tribute. Building on Proudhon, Gesell says money isn’t the key to open markets but the bolt that locks markets shut because money incorrectly priced based on interest enters and exits markets at the wrong time. Its a market distortion so money should be priced based on commodities or in Gesell terms, wares because its an all encompassing term to products in any economy. Money in Gesell’s negative interest rate world should not only be free and traded as any normal commodity but to charge interest hinders economic growth and prosperity.

If demand is viewed as money and commodities as supply, the regulator is price yet value in demand and supply is unknown. Price is always known while value in Gesell’s terms is always an illusion. A supply in tractors and apples is ready always while demand is never ready. Money locked in bank faults sees interest rates drop because supply of money is off balance. A lack of money exists in markets. Empty banks, interest rates rise because supply of money is too great. In a falling price world, supply of money is insufficient and hoarded so suppliers offer credit interest deals. An apple offered today at $2 must repay tomorrow at $3. Price rose, suppliers profited, consumer satisfaction. Restrict interest, price drops. Fear of price drops, money hides. Interest rates drove the transactions aligned to wares and forced price movement, drove money circulation. At a time when money was needed to rescue the economy and rotten apples in a falling price world, it was absent and hoarded in banks needlessly to earn little. If ever money exceeds supply of wares, credit and interest becomes king. The corollary is why must money come to markets when prices rise and at the wrong time. In a rising price world by Gesell example, if I sell four apples today, I buy a gold ring only to sell it for a loss tomorrow to the melting pot. Should a bank lend to buy a house in a rising price world. Gesell views supply and demand of capital at equilibrium at 5%.

Interest rates says Gesell is a burden to commodities so barter takes over to replace money only to see money demand drop. Marx believed money and commodities are equivalents while Gesell says money should be free and universally equivalent aligned to commodities and capital. Gesell calls this combination Basic Interest viewed as money, wares, interest / surplus. Cost plus interest must meet a sale price, consumers then pay for the positive capital. Suppliers receive negative capital since supplier receives the price paid by consumers less interest. Basic interest is the equal point where interest rates in all forms of real capital oscillates. Previously, Basic interest was raised unjustifiably because of money, not wares. The difference between negative and positive interest rates is negative has a zero bottom while positive interest goes to infinity.

The proper term for Gesell negative interest rate policies is Demurrage, a built in reduction of the currency. Negative interest rates is a forced borrowing program as central banks charge higher interest as a liquidity tax than the cost of market rates. Money is freed in the marketplace at zero and negative interest and aligned to ware prices. Its a system with a price focus but a reprice in the economic system as opposed to Keynes top down, government demand -controlled money supply. Zero and Negative interest eliminates the taxing power of money to focus on price. Done correctly, savers will find rising accounts, wages will rise, economies will skyrocket in GDP. To work says Gesell, speed in the velocity of money equalizes goods and money and stabilizes purchasing power. Velocity says Gesell is the most important factor because velocity determines prices. Negative interest not only eliminates the lower bound consideration but real capital is stagnant by the rate of interest and if removed, growth would rise so fast, negative interest would be justified.

To guard against the Basic formula Money, Wares, Interest, Gesell offered a Hausse Premium where profits would be earned from rising prices since commodities and interest rates would also rise. Interest rates would rise with prices in Gesell’s world. A rise in prices, borrowed money is paid back with a rise in commodities, governments lose by previous loans and mortgages because less commodities are received. The rate of interest as a Hausse Premium must replace what money capital loses through commodity price rises. If prices rise 5%, Basic is 3% then interest on loans must rise to 8% so money capital is unaffected. This example is an outline of prices connected to interest rates as the overall economic driver rather than money. The Austrian School in Von Hayek would say money cannot remain neutral but money influences prices. Gesell says Basic, Hausse premium and risk premiums aligns the interest rate system. Gesell advocates read Basic interest as a rate to eliminate to monetary loan rates to focus instead on risk premiums. Price stability is offered as money and wares regulates the medium of exchange rather than the previous moneylenders unearned income abilities. Inflation equals interest rate risks and inflation premiums.

What if government mandated as Gesell recommended to affix a time stamp on dollars today. What if government gave 10 days to spend $10 and offered depreciation rates at 5%, essentially a Carry rate charge and a forced decay of money. Government forces $10 to work or money is lost. That’s the basic principle behind negative interest. Negative interest forces money to move in economies, to put it to work, prevent hoarding and money decay in banks, prevent wealthy from gaining more wealth and to even level the wealth playing field among populations as wages would skyrocket. Negative interest is a zero tax on money therefore money is free and freed to perform its original function to remain as any normal commodity. A slice of bread must be eaten in 2 days so why not money to circulate with the same intended purpose as bread.

In depressions, goods still exist but money is absent or scarce. In Gesell’s negative interest rate world, depressions would no longer exist, business cycles would smooth, good times would exist always. The key is negative interest to move with prices. Negative interest allows a start from a lower base. The purpose for negative interest for central banks is to force lending, see rises in Inflation and GDP. Its not only an economic rebuild but it revolutionizes the concepts of medium of exchange in a world where all benefit Pari Passu, an equalized world where hoarding is punished but circulation is promoted. Negative interest doesn’t eliminate money, it revolutionizes the medium of exchange by shift of focus to commodities and real capital. The tractor and apples are more valuable over time than money because of its lasting value.

Brian Twomey, Inside the Currency Market,


Eonia: Levels, Ranges, Targets

Eonia trades between negative 0.3 to negative 0.2. In actuality, Eonia trades at positive 0.8 to 0.7, a 10 basis point range. The range is mandated by ECB policy and only a change at a particular meeting would reorder the range. The 10 year range from monthly averages 1- 10 is located from 10 year highs at 1.26 to 1 year at 0.87 or negative 0.12.
Current Eonia trades comfortably below all averages but because Draghi cut three times to negative since 2014, averages failed to maintain pace against current prices. As a result, averages are severely oversold from 1 – 5 years but most particularly oversold at the 1 and 3 year averages. The 10 year average reveals not only a solid down trend just underway but it confirms the current oversold condition as well as the confirmation of the 10 basis point range holding because the target is found at minus 0.26 or 0.73. Time is needed and a rest at current prices to bring the averages lower as Eonia in monthly average terms moves a few basis points per month.

The closest average to current prices is the 1 year at minus 0.12 or 0.879 and its the most oversold. The target on that average is 0.83. The 0.83 target doesn’t mean the target achieves its intended destination. What targets mean is Eonia is heading for the top of the negative 0.3 or 0.8 range. The 2, 3, and 5 year average targets are found at 84, 89 and 86 or minus 0.15, minus 0.10 and minus 0.13. Targets as well reveal the 10 basis point range.

What oversold Eonia means for Draghi is probably on hold and no further movement of Eonia for the March meeting. To move again so soon places the averages in severe flux and challenges a EUR/USD price that may skyrocket. At this experimental stage of negative Eonia and three cuts later, a higher EUR/USD would not be in the interest of Draghi overall plan.

Brian Twomey

Outline of Currency Markets of the future

1900’s German economist Silvio Gesell’s economic theories were centered on negative interest would revive economic fortunes by rebuilding Inflation to meet mandates, higher GDP and for the ECB to force borrowings away from the central bank to private bank to bank markets. Europe Inflation at the time of negative interest adoption in September 2014 was practically 0 anyway and GDP at 0.3 so ECB methodology was to go negative and rebuild economically over time. So far 15 months into negative, GDP in September 2015 was 0.4 and Inflation for January 2016 was 0.2. The M1 money supply for the most part remained stasis while Draghi now claims Inflation will meet its 2% target by 2017 – 2018. To my current knowledge, Gesell’s experiments lacked formal adoption historically.
Negative interest for central banks means not headline but pure unadulterated manipulation of overnight rates. As Eonia went negative, Sweden, Switzerland, Denmark and Norway adopted or possibly was forced to adopt negative interest. Bulgaria remains 0, Israel is on the borderline at positive 0.10. Japan’s 0.1 negative is meaningless as positive 0.9 will apply in a three tiered system to a small portion to reserves. For Europe, Denmark, Sweden, Switzerland and Norway, all created small channels to control the overnight rate and applied to a greater portion of reserves. Our economic and market trading life is now found in minute channels.
The most conservative Swiss applies a 50 basis point channel while the ECB channel is closing by the quarter. When the ECB first went negative in September 2014, the Eonia / Refi corridor as the proper name was the fairly traditional 75 basis points. When Draghi last cut, the corridor was trimmed to 65 basis points. Should Draghi cut again and much room exists to do so then the corridor compresses to 55 basis points. Two cuts then the corridor becomes 45 basis points. My observation is two cuts is maximum for Draghi as more would mean a cut to the Refi rate. At 0.05, how much is left to cut. Overnight rates at negative is one aspect but a whole different crisis develops to see headline negative especially when other central banks align monetary policies to the ECB.

The Swiss and Norway set overnight rates above Eonia while Sweden and Denmark set rates below. Denmark was hit the hardest as the Krone is pegged but Denmark CD rates trade below Sweden, below Norway and above the Swiss. As EUR/USD wanders off course then the Danish central bank is forced to spend on intervention. The effect on the US and the US between Europe is inconsequential as 0.5 headline and 0.3 in Fed Funds merely joins the chorus in monetary convergences like we’ve never seen before. One nation falls or deflation hits then all nations follow because interest rates are on the floor and converging. If Yellen raises again, interest convergence remains. What convergence means for markets and currency markets in particular is massive slowdowns ahead. And who knows if further convergence aligns to an acceptable world standard in a Gold price.

In Draghi’s last speech, he mentioned to ” look at the exchange rate”. Possibly phase two yet nonetheless a shoking statement as ECB tradition was never mention exchange rates or acceptable levels. Past ECB head Jean Claude Trichet ( J C ) was careful in his tenor never to mention the Euro despite a barrage of questions over many years but central banks now own the corridors and are in a terrific position to own exchange rate levels and control volatility.

Brian Twomey

UK Sonia Interest Rate: Levels, Ranges, Targets

Sonia, UK’s guiding Overnight interest rate, historically since 1997 found its comfort level in the area between 5.00 – 6.00. Its ranged between 5.0 – 7.0 from 1997 – 2008. Sonia was not only far higher in past decades but averages were higher. When the 2008 crisis occurred, Sonia traded at 5.5838 then began the slow grinding down slide. In February 2009, Sonia achieved its historic levels at 0 point. Levels at 0 are first ever traded since 1963. Once 0.9 was achieved in February 2009, Sonia has been on a multi year downtrend to finally see more historic lows at 0.34 December 2015. To understand the economic damage the 2008 crisis caused to many nation’s economic fundamentals and exchange rates and the long lingering effects, interest rates is the view as Sonia and most nation’s interest rates remain literally on the floor. Worse is the many many years it will take for the BOE to yet again achieve its long term Sonia rate at 5.0.

Sonia’s monthly averages from 1 – 10 years are severely out of line and it explains why GBP pairs are and has been for the past year in such disarray. Among the majors, GBP/USD correlates 80% to GBP/JPY but remainder pairs either lost correlations or correlations are so low, its insignificant. Even the Carney Cross GBP/CAD fully lost its correlations to CAD.

Sonia’s monthly average ranges longer term are found between the 10 year average at 1.81 to the 3 year at 0.43. In between is found the 2 year at 0.44, 1 year at 0.4557 and 5 year at 0.4593. Then comes the 7 year at 0.4763. Sonia closed today at 0.4668 and trades shorter term between the 7 year average above at 0.4763 and 5 and 1 year averages at 0.4593 and 0.4557.

What dictates price movements are averages 1, 2 and 3 at 0.4557, 0.4408 and 0.4366. Any price rises sees Sonia overbought as is the present severely overbought condition at 0.4668. The 3 year for example at 0.4366 sees current 0.4668 at most overbought. Price extremes at the 1,2 and 3 year averages reveal slim chances for the 7 year at 0.4763 to break anytime soon. The point at 0.47 hasn’t been seen since 2008 and that point was seen in a downtrend.

Targets in all averages also reveal 0.47 won’t break. targets from 1 year to 10 include 0.4628, 0.4570, 0.4516, 0.4971 ( Not likely) and 0.3629. The 10 year targets negative 0.28 but would require a drop of the UK’s 0.50 rate to see that target. Possibly a positive Brexit vote would see such travesties. What is expected in GBP and Sonia is more of the same without any dramatic moves in either direction.

Brian Twomey, Inside the Currency Market,

S&P’s: Higher Over Time

The larger S&P range is found between the 1 – 10 year monthly averages at 2041.62 -1444.45. The point at 1444 is overbought while 2041 is significantly oversold and much more oversold than is 1444 overbought. Since September, S&P averages are trending higher however slowly. The 10 year average for example was 1423 now 1444, the 5 year was 1626 now 1669, the 2 year was 1968 now 1999. The 1 year was 2048 now 2041 and a negligible difference. One year ago, the 10 year average was about 1200. Two factors associated with slow mover averages.
The first is 2008 crisis lows in the averages almost completely disappeared while PE ratios trailing 12 months was 19.79 one year ago and now 20.93. Today’s PE ratio is about 16.0 and not completely terrible in post crisis and historic terms. Ultimately, lower PE Ratios would be the optimum long scenario to see averages rise faster and higher but those are specific market instances.

From the 1929 close, next above are 1 and 2 year averages at 1999.33 and 2041.62 while below the oversold 3 year average is located at 1889.95. Middle averages 3, 5 and 7 years are severely oversold and present buying opportunities especially on any dips as targets reveal 1889.95 will hold. Only a striking market disaster breaks 1889.95 and then target becomes 1790.39. Rising averages supports the higher view as well.

A break of 1999.33 targets next 2006.50 while a failure targets below levels at 1976.63, 1976.43, 1927.87 and 1920.88. A break above 2041.62 targets 2066.70, 2067.25 and 2077.78. Further out along the curve targets next above 2041.62 include 2106.61.

Overall, the S&P averages are in good shape. Significant tops are not seen but rather are more oversold with room to run higher. The level at 2941 is the big point break. Failure to break would still see rises in longer term 1444 averages. Over time, 2041 would then compress versus its 1444 counterpart to cause an eventual showdown. Moving forward, I would adopt a buy dip strategy with eyes on the eventual break of 1999 and 2041.

Brian Twomey, Inside the Currency Market,