How FX Prices and Interest Rates Trade

Instruments 2020
Federal funds (effective) 1 2 3  1.55  1.55  1.55  1.55  1.60
Commercial Paper 3 4 5 6
1-month  1.57  1.54  1.54  1.56  1.57
2-month  1.53  1.56  1.56  1.55  1.55
3-month  1.55  1.57  1.57  1.56  1.55
1-month  1.55  1.56  1.54  1.54  1.60
2-month  n.a.  n.a.  n.a.  n.a.  n.a.
3-month  1.61  1.65  1.58  1.58  1.63
Bank prime loan 2 3 7  4.75  4.75  4.75  4.75  4.75
Discount window primary credit 2 8  2.25  2.25  2.25  2.25  2.25
U.S. government securities
Treasury bills (secondary market) 3 4
4-week  1.51  1.50  1.50  1.49  1.56
3-month  1.51  1.52  1.54  1.53  1.54
6-month  1.51  1.53  1.54  1.53  1.53
1-year  1.51  1.50  1.49  1.47  1.44
Treasury constant maturities
Nominal 9
1-month  1.54  1.53  1.53  1.52  1.59
3-month  1.54  1.55  1.57  1.56  1.57
6-month  1.55  1.57  1.58  1.57  1.57
1-year  1.55  1.53  1.53  1.51  1.48
2-year  1.49  1.44  1.45  1.42  1.41
3-year  1.48  1.41  1.45  1.39  1.37
5-year  1.51  1.44  1.47  1.41  1.39
7-year  1.61  1.52  1.56  1.51  1.49
10-year  1.70  1.61  1.65  1.60  1.57
20-year  2.00  1.91  1.95  1.89  1.88
30-year  2.14  2.05  2.10  2.05  2.04


Above is one of my favorite topics in fx and trading and that is interest rates. Presented is the Fed’s H15 daily release at 4:15. This is the true Yield Curve and no other exists. This yield curve is severely off kilter but the Fed’s Yield Curve has been severely off kilter for years. Its not the overnight rate at 1.60 to inform off sync although today it plays a significant role. Its the maturities response to 1.60.

Lets view reverse osmosis to understand and to our FX prices.

The position of the overnight rate 1.60 Fed Funds for a perfect Yield Curve should be located at the center to all maturities. At the center means the yield curve is perfectly balanced as an equal amount of maturities exist above and below. A true financial market then exists to include Fx prices by selling high and buying low using 1.60 as the guide. All Market and FX prices presently are incorrect because of the current Yield Curve imbalance. The imbalance is derived from all maturities trading below 1.60. A market of this caliber is treacherous and requires expertise due to extreme non normality.

When the ECB went negative in 2015/2016 and Libor eliminated, all Central banks redesigned their interest rate focus to match their own financial market prices and FX. What changed was 1.60 and all central bank overnight rates would become the sole drivers to maturities rather than an equal chance for maturities to drive 1.60. This translates as central banks by sheer power adopted full control of the yield curve, market prices and Fx. No longer a free market but a central bank controlled market.

When I state my daily FX interest rate trades are derived by central banks, factored by interest rates and given freely by central banks. Here it is.

Example. Commercial Paper Financial and Non Financial. The most vital interest rate on god’s planet because maturities drive money flows. Non Financial maturities if memory serves drives and dictates money prices offshore while Commercial paper Financial drives money flow prices onshore United Stated for money funds, money markets, banks and a long list of interested financial parties. It drives Treasury yields, FX prices, Stocks, Bonds. it drives loans of any sort from big ticket items to cars and every loan in between. Commercial paper Rates should be the talk of the town for market traders, not Fed Funds because Fed Funds don’t move. Can’t predict an unmovable interest rate.

Note the unusual rise this week from 1.55 to 1.60. This is a stunning move for today’s markets. This says to market trades, USD maturities radically dropped and allowed Risk currency pairs to rise. The USD drop allowed GBP to trade higher from extreme overbought at mid week to ballistic extreme by Friday. It allowed extreme AUD/USD Lows to travel 200 pips lower to ballistic extreme.

What central banks offered by overnight rate and maturity control is a range of allowable FX and all market prices to trade. A range however that has been severely restricted more and more over the years. Today’s ranges are at lowest depths since EUR introduction in 1999.

To add insult to injury, Central banks inside post Libor redesign efforts, slashed maturities to ensure range compression would become permanent. An FX price compresses because it lacks a maturity to match against an fx price. We only have so many maturities to work with. The ECB once had 15 maturities, now 5 maturities exist.

Every central bank on the planet has been working tirelessly to slash maturities, allow overnight rate control and dictate FX prices. Every central bank contains its own unique orientation to its interest rates and FX prices and no two central banks are the same. This explains why certain currency prices trade wide ranges, other FX prices are dead. Its the variation between overnight and maturity control to dictate each particular system’s FX prices.

Central banks normally maintain overnight rates at a firmly controlled rate. For example, the Fed 1.55 was actually 1.54 to 1.58 since last October 2019. As an interest rate changes, the overnight rate and FX prices adjust to the changes. A 25 Basis Point move adjusts the overnight rate by 12 to 12 /12 Basis Points. Maturities then must also adjust to the changes.

Traditionally, this process of interest rate normalization once took 5 full trade days. Against Central bank control and diminished maturities, normalization is seen in 1 or maybe 2 days. Certain nations, normalization priced the interest rate change before hand. Most nations are now following the exact model to priced changes. This means no movements to fx prices on an interest rate change.

If ever anybody wondered to why no movement to FX prices on an interest rate change, its because of the 12 to 12 1/2 pity move to the overnight rate and the even less of a move to the supporting interest rate maturities. The interest rate system quickly falls in line to never allow a market price to move.

Note 1.60 and supporting maturities. The Apple truly doesn’t fall far from the tree. Add the Fed’s General Collateral and Tri Party Repo rates and nothing changes at yesterday’s 1.55. How about the new Fed SOFR rate or the Secured Overnight Funding rate at 1.58.

Interest rate maturities love each other and maintains a close relationship. Central bank control of overnight rates ensures this marriage maintains far into the future. FX and market price movements however despise this love affair. Yet the balance won’t break anytime in the future. It means daily and weekly ranges compresses further over time.

Central banks are working on Risk Free Interest rates. It means addition of another interest rate. The Fed’s SOFR is a good example. Risk free interest rates are complements to the 1.60 overnight rate. Notice yesterday’s 1.60 Fed Funds to SOFR 1.58.

To add another interest rate as the central banks are working on currently means FX range movements will die yet another painful death. An extra interest rate adds yet another FX price point that must rise or fall throughout any trading day. It is an extra FX price point that requires a break up or down to ensure the FX price continues to allow enough movements to profit.

Note the extra interest rate is located not outside but inside the current mix of maturities. This fails to assist to fx price movements and profits.

Economic releases are now fully controlled by the central bank’s command and control to overnight rates and maturities. The economic release is found inside the FX price and the FX price is found inside interest rate maturities. A release as expected means no moves. An off kilter release might see a few points trade immediately yet its all contained within the daily ranges and price points offered by the central banks.

As daily market prices are now contained in a wide 7 1/2 time frame to include the major economic releases,  the vast majority of an FX price is located in exact equilibrium. An equilibrium price is untouchable until an extreme price trades. If an extreme price fails to trade then no trade for a currency price.

Extreme is not necessarily true commentary but maybe correct daily buy and sell points for day trades is more apt as explanation.

Its actually rare to see extreme prices anymore. It happens but not as often as once existed in currency prices. Trade systems and models required deep adjustments to the new central bank interest rate system. It is a deep requirement to retail traders who are looking to far and wide at their currency prices.

What the central banks controlled is not only interest rates and FX prices but they changed the markets orderly structure. The structure and order still exists but it was severely adjusted to favor the central banks and not the market trader.

This will not change anytime soon.


Brian Twomey