Markets contain solid and well known structures. For the past 1000’s of years, Gold and Silver was the structure. Since 1971, interest rates replaced Gold and Silver as the main trade vehicle. Gold and Silver never left nor could ever leave markets especially as Gold/ Silver Ratios remains a premiere currency trade signal.
Markets in 1971 went back to 1896 and Knut Wiksell to design interest rate markets and it all began with the 3 month interest rate. From the 3 month rate began new interest rate maturities then came Libor to connect the world’s currency price to 1 interest rate. Overnight Swap rates then began in 1996 and its popularity as a trade vehicle and currency trade signal soured. To understand and see interest rate progression, the Bank of Canada offers historic interest rates dating to 1939.
What solidified interest rate markets and currency prices in particular was overnight rates. Overnight rates allowed interest rate curves, trend lines and trade methods to draw and construct. Banks and interest rate departments use the word derivative while we maintain simple here by use of interest rates.
Libor elimination and proliferation of interest rate maturities since 1971 forced central banks to redesign interest rate markets under a 2 year process from 2014 to 2016. As interest rate markets are well established and matured, wholesale changes was impossible therefore interest rate markets were rearranged and new place settings at the table were implemented.
Pre 2014, interest rate to the exchange rate was top central bank priority and trade method. Post 2016, focus shifted to strictly interest rate markets and exchange rate as an indirect effect. Trading methods in currency prices remain the same but as central banks rearranged the tables, trade methods, signals and targets shifted along with the changes.
If monies floated and traded through interest rate markets then exchange rate containment would become automatic. Why intent focus on Sonia in the UK is because final changes from 2014 implements this month. More important, we’re dealing with Statistics and market departments with vast understanding and ability to redesign markets. Their knolwedge far surpasses most traders in all markets.
Changes to each nation means currency price signals and triggers were revamped. Each nation’s interest rate markets contained a uniqueness yet all interest rates nation to nation remain relatively the same price. OCR in Australia and New Zealand for the most part are the same yet used vastly different. Australia OIS and Swap Rates and New Zealand OIS and Swap rates are the same yet use vastly different. Fed Funds and Eonia are the same but used differently in traded markets and correlations were designed as total opposites.
Certain interest rates are designed as tops, trade able levels, ranges and targets. Certain interest rates targets long term while other rates are designed for short term. The short term example is the previous GBP/USD / Sonia trade in the last post. The trade was done with profit at less than 2 full hourly candles. Nothing new here as we trade this method twice daily without ever a loss.
Note the focus not on yields as yields serve as another market far away from an interest rate and currency price and contain no assistance or reference to a currency price.
Yesterday’s NZD Swap rates: 1.7950, 1.8375, 1.8800, 1.8883, 1.8966 and 1.9050. The RBNZ employs a Swap Rate Close price as the 10 and 2 yield and its used to view a bottom currency price in the far far distant future.
Yesterday’s Swap rates inform NZD/USD at 0.7509 to 0.7805. NZD/USD traded at 0.7300’s informs for the most part, headwinds exist to upper NZD prices. Yesterday’s NZD selloff was no surprise.
Today’s NZD/USD will see a range from 0.7322 to 0.7393 with a must cross at 0.7378 above and 0.7332 below.
Obviously much more exists to an interest rate / Currency price trade strategy but the basics were offered and its offered and traded twice daily by me and those who join my signal service.
Message to long time friends, readers and followers is don’t look for Fxstreet or Investing.com posts any longer. Its no longer worth the trouble.