Posted Nov 6th in the DXY V EUR/USD monthly view was stated DXY was on the verge of a major break higher and would remain for years in the future. Trump was the impetus as DXY broke higher. What remains for EUR/USD downsides are levels, 1.0597, 1.0585, 1.0545, 1.0508 then far lower 1.0375. The main question to DXY is how are many markets before and after Trump.
USD money markets up to the 1 year rate before the election:
Mean: 1.51, Median: 1.47, Range: 57 basis points, SD: 0.1815. Skew: 0.27, Kurtosis: 1.70. Signal to Noise Ratio: 8.36, Coefficient of Variation: 0.11. Actual basis point channel : 40. The Statistics of extraordinarily high concern is Noise at 8.36 and Variation at 0.11. USD is now at the high fo highs and zero explanations inside current prices.
Mean: 1.66, Median: 1.62, Range: 63 pips, Actual Basis Point channel: 48, SD: 0.1996, Skew: 0.44, Kurtosis: 1.88, Signal to Noise Ratio: 8.31, Coefficient of Variation: 0.12.
While the mean rose 15 basis points, not only is Noise far to high and in dire need of correction but Kurtosis begins a concern above 2.0.
What skews money markets is Fed funds inability to trade. Before Trump, Fed Funds closed at 41 while after Trump closed at 0.41. Yields 1 month to 3 year trade below 1.66 while yields 5 to 30 trade above. A 15 basis pointy move in money markets rates allowed a green light to the 10 year to rise.
Why USD money markets are vitally important is because its the building blocks to higher yields, commodities, stocks and all financial instruments associated with USD. USD money markets trade below all financial instruments. The corresponding difference by design is Europe as German yields 3 month to 20 year trade far below European interest rates.
EUROPE before Trump: Mean 1.71, Median: 1.66.
After Trump Mean: 1.71, Median: 1.66.
Eonia before Trump 0.64, After Trump 0.65. Europe’s interest rate channel remained stasis at 0.31. Before and after Trump, Europe remained stasis as USD was fully responsible for current market moves.
USD On OCT 9th, yield spreads 10’s to 2 year traded 0.88, Friday 1.28, and 1.24 today. !0 year to 3 month Oct 9 traded 1.32, Friday 1.91 and 1.87 today. Oct 9th, 10 to 30 year traded 0.73 and dropped today to 0.67.
August 24th in “Fed Funds and the Natural Rate of Interest”, Knut Wicksell’s Natural Rate of Interest then was 1.64. Yellen in August warned markets to the Natural Rate Indicator as today’s Natural Rate based on recent Inflation at 1.6 is now 0.84 and 0.34 factored to Core. The extraordinary and highly bullish development is Fed Funds at 0.41 now trades above the Natural Rate of Interest.
Despite bullish for DXY and the US economy moving forward into the far distant future, two aspects of concern remain. Fed Funds from averages 1 to 10 years remain in stratospheric overbought yet averages from 10 to 20 are fine and normal. Inflation at 1.6 matches the interest rate curve and trades below the 10 and 5 year yields yet for the first time since 1960, trades far above Fed Funds. A Fed Funds rise, reveals Inflation remains at exorbitant levels and an unwanted development if USD economic expansion is underway particularly if Trump is able to extricate the Keynesians on the Fed Board and institute once again the normalized Supply Side Price system.
Brian Twomey, Inside the Currency Market, btwomey.com