Fed Funds and New Market Structures

In June 2016, all markets especially currency markets re structured by central banks. Took 2 years of research and began by the ECB to understand and fully view the effects in interest rates to market prices. But market prices includes every traded financial instrument on the planet from currencies, to yields, to commodities, to WTI, to stock indices etc. The Federal Reserve for example changed Fed Funds from a Volume weight mean to volume weight median. Now the BOE is in the midst to change Sonia to a volume weight median. The RBA is contemplating volume weight medians. The change as the BOE explains it results in about a full point shaved off the traded interest rate market price. This development should be alarming to market people because all market prices and in all markets, ranges were severely compressed.
All market prices and in all financial instruments begin and end in the center of the price curve. Pre June, market prices roamed and settled at higher, lower or middle bounds in the price path. A free money day trade in a short or long was seen when a market price settled at the highest or lowest bounds. No longer is this easy trade available. Post June, the speed, the trend, the overall price movements and the upward or downward progress to a price was severely slowed.
What changed was the center of gravity. A slower price path means a longer length of time in a trade yet for day traders to understand the deep esoterics to my words, then the day trade was completely reorganized. Range breaks are big events in the life of a market price yet central banks prevent range breaks so to allow the price to roam in smaller ranges for longer periods of time. The positive side to this story is extraordinary opportunities exists to successfully trade markets but the sophistication was altered therefore the “how to” trade strategies must change.
Fed Funds at 0.91 means a dead center price with an average for Monday at 0.91198. The outer extremes are located at 1.01052 and 1.01482. Prices change everyday. Thursday’s outer extremes were 1.03 to 0.89. The inner extremes are located from 0.89133 to 0.89571. Next are range breaks at 0.90524, 0.91479 and 0.92452.
Fed Funds on Monday will trade from 0.90524 to 0.91479. From the 91 center, Fed Funds will fan out and trade towards ranges but ranges won’t break therefore Fed Funds will trade back and close at the center. This daily operation describes every financial instrument on the planet under new structures.
The bottom side to Fed Funds will trade at 0.90545 and just above the range break point at 0.90524. The higher side will trade to the average at 0.91198 with stiff resistance at 0.91455 and 0.91500. Targets are located at outer extremes at 0.91541 and 0.91500. Most likely targets will be seen at 0.91305 and 0.91096 and just below the range point at 0.91479.
Fed Funds is a market instrument and as a traded instrument, it contains trade able levels, averages, support and resistance lines. Fed Funds Monday for example will trade inside 0.90524 to 0.91479 ranges from 0.91468 to 0.90545 and 0.90572. The overall range is a paltry 0.00955 and assumes the full range will trade.
In days of old, pre June ranges were 1, 2, 3 and 4% and resulted in hundreds of points per day traded rather than today’s 50 and 100 point days. The S&P’s best day last week resembled the Norwegian stock market at 17 points, WTI traded 2.48 points, EUR/USD 98 pips and 86 in the prior week. For currencies, control the major pairs then power is held against cross pair movement since far more cross pairs exist to every major pair.
The bottom side at 0.90524 means USD/JPY will trade to 111.03. The S&P’s will trade to 2336.42, WTI will trade to 47.90, 2 year yield will trade to 1.257, the 5 year yield will trade to 1.947.
Ranges from 0.90524 to 0.91479 means USD/JPY trades from 111.03 to 111.58. The S &P’s trades to 2348.12, WTI trades to 48.22, the 2 year yield to 1.264 and 5 year yield trades to 1.956.
If Fed funds trades to the average 0.91198 then USD/JPY will trade at 111.19, S&P’s will trade 2344.67, WTI to 48.14, 2 year yield to 1.26231 and 5 year to 1.95302.
Assume upper range at 0.92452 breaks then USD/JPY trades to 112.15, S&P’s to 2360.05, WTI to 48.46, 2 year yield to 1.2705 and 5 year to 1.9668.
DXY from range points 0.90524 to 0.91479 will trade 99.23 to 99.83 and to 100.34 if a break higher is seen in Fed Funds at 0.92452.
What changed in the new market structure is the starting and stopping price points because then it allowed for the ranges surrounding the price to fortify around the close. The currency price is challenged and its a far different animal than its counterpart instruments because its a smaller price yet it has ranges but needs ablity to move. Every other market instrument on the planet was made far easier to trade yet ranges were severely restricted which means the price must be viewed from smaller ranges.

 

Brian Twomey

 

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