DXY VS Fed Funds Monthly: Levels, Ranges, Targets

 

Most vital disclosure to the Fed Funds and DXY relationship is lack of Correlation from monthly averages 1 to 10 years. The 1 and 10 year correlations are negative which means overall Fed Funds and DXY function from 2 separate levels. Its a question of distance as Fed Funds is far to high and DXY substantially low. What led to the Correlational disfunction since 2008 is Fed Funds hit 0.04 bottoms and embarked on a slow yet straight path higher to current 0.91. DXY on the other hand bottomed at 70 in 2008 then bolted to 89 by Feb 2009. DXY then hit 79 lows May 2014 and 103 highs by Jan 2017.
The difference between Fed Funds and DXY is DXY is afforded wide ranges while Fed Funds is contained inside the Fed’s 0.25 tiny ranges. Fed Funds this month for example from monthly averages 1 to 9 years is allowed an 0.18 to 0.20 average range and 0.20 to 0.30 from averages 1 to 10 years. DXY range overall this month is 600 pips.
As new information is imparted to markets, DXY was obligated to respond to its specific pip location and its the price position of DXY from market developments that led to the Correlational disconnection. Working against DXY / Fed Funds Correlations was the straight upward path in Fed Funds stacked against poor economic news.
Fed Funds broke its respective trend lines higher while DXY broke lower. Fed Funds now sits miles higher against its trend lines while DXY sits miles below. Why the positive 43% to 60% Correlations from averages 3 to 8 years is because of the close distance Fed Funds shares above against DXY below. The averages driving Fed funds is the 10 year and minus 0.25 Correlation Vs 11 year. DXY is driven by its 1 and 2 year averages and the minus 0.05 Correlation at the 1 year.
The unanswered question to why Fed Funds never corrected to meet DXY’s price and proper Correlation is the effect of paying interest on Required Reserves in the early days of 2008 so not to see Fed Funds trade to or below 0. Paying interest on Required Reserves forced upon Fed Funds the 0.25 ranges and bottom rescue while DXY was allowed to float freely.
Fed Funds overall at 0.91 is clear. From monthly averages 1 to 9 years, Fed Funds price is far to high, its range is far to high and its severely overbought. DXY is more oversold than overbought but the current price in range terms is far to high. From trend lines in overall averages, DXY ‘s price flat lined and trades sideways at current bottoms.
Fed Funds trades between its 10 and 11 year averages from 0.63 to the 11 year at 1.05. Below 0.63 then next comes the 1 year at 0.56, 2 year at 0.40 then the averages are located progressively lower to 0.19 and 0.20. Fed Funds from averages 1 to 9 year are outside its ranges and inside the ranges begins from 0.68 to 0.50’s. The 9 year average perfectly flat lined in the Fed Funds Vs DXY relationship and imparts zero actionable information.
The 10 year average range runs from 0.21 to 1.41 against an 0.81 mid point. At the 0.63 Fed Funds average, its the closest average to 0.91 yet the trend line is severely downsloped as DXY and Fed Funds trades below. The 10 year is clearly the average driving the Fed Funds /DXY relationship currently and could easily become the main average to run the relationship long into the future.
The justification and reason for a Fed Funds rise is unknown particularly against a far to high Fed Funds price and an unwarranted economic situation.
DXY trades between its 1 and 3 year averages from 98.53 to 3 year at 95.51. Higher to 98.53 must cross the 2 year at 97.74. Below 95.51 then next comes the 4 year at 91.76, 5 year at 89.69 and 6 year at 87.85. Below 95.51 clearly explains the flat lined bottoms in the Fed Funds Vs DXY relationship as wide territory exist to next average at 91.76.
Immediate bottoms are located at 95.10, 95.75, 95.89 and 96.48. Below 95.10 then only the 9 and 10 year averages run DXY because DXY becomes far outside ranges against all respective averages.
Immediate break points above on the way to 97.74 are 97.03 and 97.09. Above 97.44 and on the way to 98.53 then next comes 98.31 and 98.73. Then begins 99.00’s.

Overall, DXY is looking for an excuse, a reason or market development to travel much higher as the bottoms are here.

 

Brian Twomey

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