Month: August 2020
National Financial Conditions Index
GBP/CAD Trade Results
Monetary Conditions Index
1. Introduction
Monetary policy affects economic activity and
inflation through a series of channels, which are
collectively known as the transmission
mechanism. Changes in the monetary
authority’s policy rate are generally transmitted
into changes in the market and retail interest
rates, which can affect households’
consumption and saving decisions, firms’
investment and borrowing behaviour and finally
output and inflation. In a flexible exchange rate
economy, changes in the policy rate also affect
the value of the domestic currency vis-à-vis
other currencies, influencing the
competitiveness of domestic exports and
imports, and ultimately affecting net trade and
hence aggregate demand. In addition to this,
exchange rates can also have a direct effect
on consumer price inflation, via domestically
consumed imported goods.
The Monetary Conditions Index (MCI) was
developed in the early 1990s with the aim of
providing information on the stance of monetary
policy taking into account both the interest rate
and the exchange rate channels. It is a
weighted average of the short-term interest rate
and exchange rate. Initially it was used as an
operational target by the Bank of Canada and
Reserve Bank of New Zealand, but
subsequently its role diminished due to
problems in its construction and interpretation,
and it is now used less frequently and only as
one indicator amongst many in monetary policy
analysis.
With this in mind, it is not the aim of
this paper to contribute to the current
conjunctural monetary analysis, but rather to
discuss the origins of the MCI and to highlight
some limitations and issues relating to its
implementation and use.
With the increasing financial complexity of the
modern economy, growing attention is paid to
how other financial variables including the price
of various asset classes affect the economy.
Moreover, policy makers have placed an
increased emphasis on financial stability
considerations given that changes in financial
variables affect wealth and balance sheet
considerations of various sectors in the
economy. This has led to an interest in the
development of Financial Conditions Indices
(FCI), which seek to provide a simple measure
of how financial market variables impact on the
economy above and beyond the standard
interest rate and exchange rate channels.
However, in many senses the FCI can be seen
as an extension of the earlier MCI. Moreover,
many of the methodological difficulties
associated with the construction of the MCI, as
well as many of the caveats and criticisms, are
also germane to FCIs.
The article proceeds as follows: Section 2
describes the MCI and its construction in more
detail, and identifies possible uses for the
index. Section 3 outlines the various important
issues related to the index regarding both its
methodology and its interpretation, while
section 4 looks at the MCI for some major
economies, and briefly discusses its
movements over the past decade. This article
also includes two boxes: the first provides
greater technical information on the choice of
weights used to estimate unobservable
elements of the MCI, while the second box is
based on a case study of the Canadian and
New Zealand MCI.
2. A description of the MCI
The MCI, which was first developed by the
Bank of Canada in the early 1990s, is
calculated based on a weighted average of
changes in short-term interest rates and
exchange rates relative to some reference
period. It aims to provide information on the
economy and inflation for monetary policy
analysis. A change in the index indicates how
‘tight’ or ‘loose’ monetary conditions in the
economy are, relative to a certain reference
level.
The most obvious benefits of the MCI are that it
is straightforward, easy to understand, and, in
the past, was seen as a better indicator than
just focusing on interest rates, given the role of
the exchange rate in the transmission
mechanism. Even though it was used by
central banks, international organisations, as
well as financial corporations in different ways
over the years, it has various shortcomings.
It is
difficult to operationalise given that it combines
a monetary policy tool (interest rate) and a
macroeconomic outcome (the exchange rate)
and a lot of judgement is required for its
calculation.
A Discussion of the Monetary
Condition Index 70 Quarterly Bulletin 01 / January 10
2.1 Definition
The basic formula for the MCI is as follows:
MCI = −[θ1(Rt − R*) + θ2 ((et − e*) × 100)]
(Equation 1)
• Rt represents the level of the short term
interest rate, and et is the log of the
effective exchange rate at a particular
point in time t
2
. If e increases it implies
that the domestic currency is
appreciating. Either real or nominal rates
for each of these variables can be used.
Short-term money market rates are used,
as they are closely aligned to the policy
rate, and the decisions by monetary
authorities transmit quickly into these
rates.
• The asterisk denotes the reference level
of each of the respective variables. In
theory, the reference or base levels for
the variables should reflect ‘‘neutral’’
economic conditions, but in practice this
is difficult to operationalise, hence a
simple average over a period of time is
generally used3
. Rather than focusing on
the absolute levels of the variables,
changes in the variables with respect to
this base level are used. If the (Rt − R*)
or respectively the (et − e*) component is
positive it means that the current interest
rate, or respectively the exchange rate,
is higher than that observed on average
during the reference period.
• The weights applied to interest and
exchange rates, θ1 and θ2 respectively,
typically add up to unity. The ratio θ1/θ2
reflects the relative impact of the interest
rate and exchange rate on the economy
as measured by either aggregate
demand or prices, although the former
method appears to be much more 2
The short-term rate usually employed is the 3-month interbank
rate, and the effective exchange rate is a weighted average of
bilateral exchange rates against major trading partners.
The
difference in the log of the exchange rate is mulitplied by 100 in
order to express it as a percentage. 3 Ideally, optimal or equilibrium levels of the interest rate and
exchange rate could be used, estimated from a Taylor type rule or
an equilibrium exchange rate model, but in practice these are
exceptionally difficult to accurately estimate.
prevalent in the literature4
. Therefore, if
there is a rise of θ1 percentage points in
the interest rate, it will have the same
effect on the policy goal as a θ2 percent
appreciation of the domestic currency,
so that a larger ratio will mean a weaker
overall affect of the exchange rate in the
MCI.
There are a number of possible
methods to derive these weights, which
are outlined in Box 1.
• Finally, a negative sign is usually
attached to the overall computation of
the index so that, when there is a
decline (increase) in the index, as
defined by Equation 1 above, it indicates
that monetary conditions have tightened
(loosened)5
.
2.2 Possible uses
In the implementation of policy, monetary
authorities focus on a number of variables, from
the ultimate target (frequently inflation) at one
end of the spectrum to the policy instruments
(such as the short-term interest rate) at the
other. Due to long lags and the indirect
connections between the target and the
instruments, monetary authorities resort to
operational targets6
, information variables and
indicators that link the two.
These intermediate
variables or targets are closely linked to the
ultimate target and are influenced by changes
in the policy instrument (Freedman, 1994). The
MCI falls within this group of intermediate
measures, and can be used as an indicator or
operational target in the conduct of monetary
policy.
When the Bank of Canada developed the MCI
in the early 1990s, it was used as an
operational target in the design of monetary
policy, and was then subsequently used in the
same way by the Reserve Bank of New
4 Some commentators criticised the practice of deriving the weights
from an aggregate demand function when the overall target was
inflation, as was the case in Canada and New Zealand.
However,
one of the reasons for focusing on aggregate demand is,
‘‘because it is the output gap, along with expected inflation, that is
the principal driving force behind increases and decreases in the
inflationary pressures and it is changes in aggregate demand that
are a key determinant of changes in the output gap’’ (Freedman,
1994).
5 The rationale for the negative sign is that tighter monetary
conditions generally bear down on activity levels and looser policy
generally does the reverse.
6 The operational target of monetary policy is an economic variable,
which the central bank aims to control by use of its monetary
policy instruments. It is the variable the level of which the
monetary policy decision-making committee of the central bank
actually decides upon in each of its meetings (Bindseil, 2004).
A Discussion of the Monetary
Condition Index
Quarterly Bulletin 01 / January 10 71
Box 1: Calculating the MCI weights
The MCI, as outlined in Equation 1, contains certain unobservable elements that
need to be estimated, namely the reference levels for the interest and exchange
rates, and the weights attached to deviations between these variables and their
respective reference levels. Overall, the size of θ1/θ2 should capture the effect of
percentage point changes in the interest rate relative to a percentage change in
the exchange rate and its accuracy is conditional on the particular model used
for estimation. This box reviews the different methods used in the literature to
estimate the weights.
Batini and Turnball (2002) posit that there are
three main methods for estimating the MCIs’
weights:
Single Equation based MCIs
One of the most common ways of deriving the
weights based on the above rationale involves
estimating an aggregate demand function,
similar to the following:
∆yt = α ∆ Rt + β ∆ et + x + error
Where ∆ is the first difference operator which
captures the change in the variable over time1
,
y is Gross Domestic Product (GDP), R is the
interest rate and e is the exchange rate.
The
subscript t refers to the current or latest time
period. Overall, this function seeks to discover
the effect of changes in interest rates,
exchange rates and other economic variables,
represented by x in the equation above (i.e.
current and lagged values for GDP of main
trading partners), on GDP.
From this equation,
α and β, the partial derivatives of the interest
and exchange rates respectively, can act as
the weights θ1 and θ2, so that the ratio of the
coefficients in equation 1, θ1/θ2, equals the ratio
α/β.
Multiple Equation based MCIs
There are also more elaborate multiple
equation-based methods. These methods
involve estimating and simulating structural
macro-econometric models in which the
weights are then obtained from a system of
equations rather than just one.
The weights can
also very often be estimated using vector
autoregressive models (VARs), with time series
of GDP, exchange rates and interest rates.
Subsequently, impulse response functions
(IRFs) are derived. The IRFs measure the
response of GDP to individual shocks in both
the interest rate and the exchange rate.
The
weights θ1 and θ2 are then based on a
cumulative average responsiveness of GDP to
shocks in the interest and exchange rate
respectively over a certain number of quarters.
A critical element in the use of this approach is
the correct identification of shocks to the
relevant variables.
Many banks and
international organisations use the weights
estimated from existing structural
macroeconomic models, for example the OECD
bases its weights on results from their Interlink
Model.
MCIs based on large macroeconometric models, especially those that
contain a monetary policy reaction function, are
more instructive as they take account of more
features of the economy.
Trade share based MCI
This final method is simpler to calculate. The
exchange rate weight is based on the long run
exports-to-GDP ratio and the interest rate
weight is simply one minus this ratio.
The
rationale is that this net trade component
captures the effect of the exchange rate on
GDP relative to interest rates.
However, it is
used less frequently given the simplicity in
relation to the estimation of the weights and,
consequently, the lack of detail about the
effects of the relevant variables on the
economy.
Overall, the multiple equation based model is
generally deemed to be optimal, as it takes
account of the cumulative lagged impact of the
different variables.
The dynamics of the
underlying model are very important; a model
that takes account of the different lags at which
an economy responds to changes in interest
rates and exchanges rates would perhaps
deliver a more accurate index. If a model is too
simple, or fails to take into account key
characteristics of behaviour, the measurement
of the weights can be flawed, meaning that the
MCI itself is built on erroneous foundations.
1
The operator is defined as ∆yt = yt − yt−1, which is the change in
GDP from the previous period.
A Discussion of the Monetary
Condition Index
72 Quarterly Bulletin 01 / January 10
Zealand between 1997 and 1999 (see Box 2).
The rationale for adopting this policy was that it
may be difficult to predict the response of the
foreign exchange market to a change in the
policy rate (Gerlach and Smets, 2000).
The
theory of uncovered interest rate parity7
suggests that interest rates and exchange rates
are related in a systematic way, although
empirically this relationship does not always
hold.
Hence, there is still no completely clear
understanding of the interaction between
interest rates and exchange rates.
Above is wrong
The method used in the case of the operational
target, which was particular to these two
countries, involved having an inflation target8
and deriving a solution for future interest rates
and exchange rates consistent with the target
after having taken into account domestic and
foreign economic conditions.
Using these
projections the bank was able to derive the so called ‘desired’ MCI level, which could
represent a range of values rather than point
estimates.
The forward-looking focus of this
approach took into account the lags between
the monetary policy stance or changes in it and
the effect on the rate of inflation9
. If the actual
level of the MCI deviated from the desired
path, the Bank would use the tools at its
disposal (for example, the overnight rate) to
adjust the index accordingly.
It is important to note that using the MCI as an
operational target does not imply an automatic
reaction to all exchange rate changes, since
the target level of the MCI varies in response to
shocks that affect the exchange rate.
In the
case of an aggregate demand shock, the
desired level of the MCI will change, whereas if
there is a credibility shock, the target MCI level
should remain unchanged ceteris paribus.
As
Charles Freedman, the deputy Governor of the
Bank of Canada at the time put it,
‘‘A lot of judgement goes into it, and there
is a lot of cross-checking against important
information variables such as the rate of
growth of monetary aggregates10’’.
7 The theory of uncovered interest rate parity states that ‘‘the
exchange rate against a foreign currency deviates from its
expected value at some future time by the size of the interest rate
differential (over the appropriate horizon) with that country’’
(Stevens, 1998).
8 Canada had an inflation range of 1-3 per cent and New Zealand
had a target of 0-3 per cent. 9 For Canada, Freedman (1995) estimated that monetary actions
would influence the rate of inflation in about 6 to 8 quarters ahead.
10 Excerpt from remarks made by Deputy Governor Freedman to the
Conference on International Developments and Economic
Outlook for Canada, 15 June 1995.
The use of the MCI as an operational target
diminished over time, due to pitfalls that
emerged when the index was used in this
capacity. In particular there was great
uncertainty regarding the source of exchange
rate movements. A more detailed look at these
problems in Canada and New Zealand, are
discussed in Box 2.
With the MCI’s relevance as an operational
target declining, it has increasingly been used
as an indicator in monetary policy analysis.
In
this capacity, monetary policy tools are no
longer used to adjust the level of the index to a
desired path, but rather it merely helps to
inform policy makers of the current stance of
monetary conditions, and whether they are
tighter or looser relative to other periods.
3. An evaluation of the MCI
The MCI presents some problems both at the
level of construction and in terms of its
conceptual and empirical foundations, which
are outlined in this section.
3.1 Methodological Issues in constructing
a MCI
In constructing a MCI, an initial technical issue
is to determine the appropriate weights.
Since
the weights of the components are not directly
observable, but are based on econometric
estimates, they are highly sensitive to the
model used (see Box 1) — i.e. the MCI ratio
can suffer from model uncertainty.
The main
pitfalls involved in deriving the weights
therefore, vary between the models used and
are consequently model dependent.
The
principal problems include capturing the
correct dynamics of the relationship, as interest
rates and exchange rates can affect the
economy at different speeds, and parameter
constancy, which requires that the coefficients
from the models used to calculate the weights,
must not change depending on the time period
used
11. If these problems are not adequately
dealt with, the weights that are derived risk
being erroneous and may provide an
inaccurate picture of monetary conditions (Eika
et al. (1996) and Batini and Turnball (2002)).
11 For a further and more detailed discussion of the econometric
problems involved in calculating the MCI weights please refer to
Eika et al. (1996) and Batini and Turnbull (2002).
A Discussion of the Monetary
Condition Index
Quarterly Bulletin 01 / January 10 73
Box 2: MCIs as an operational target — problems in practice
A number of difficulties and challenges emerged during the period in which the
MCI was used as an operational target by both the Bank of Canada (BoC) and
the Reserve Bank of New Zealand in the 1990s.
Some examples of these
problems are highlighted in this box.
While the MCI appeared to be attractive as an
operational target for the BoC, it became
evident that there were a number of
shortcomings.
Firstly, there was a tendency on
the part of some observers to treat the MCI as
a precise short-term target for policy, while the
Bank indicated that it should not be treated as
a narrow, precise measure.
Secondly, the
markets started to treat all exchange rate
movements as portfolio readjustments on the
part of investors (portfolio shocks) and,
therefore, came to expect an offsetting interest
rate adjustment every time there was a
movement in the exchange rate, whether or not
such an adjustment was appropriate.
In
addition, the central bank itself had to make a
judgement on the source and likely persistence
of the shock to the exchange rate, in order to
decide on the appropriate response.
Indeed,
this caused problems in 1998, when the rapid
depreciation of the Canadian Dollar produced
accusations of a myopic central bank (Robson,
1998), whereas the BoC argued that the
depreciation signalled looser than desired
monetary conditions that warranted sharp
increases in the policy interest rate.
Given the difficulties mentioned, less emphasis
was placed on the role of the MCI as a
Related to this, even if the model for deriving
the weights is correctly specified and manages
to accurately capture the effects of the interest
rate and the exchange rate on the economy,
over a certain period of time, there is always
the possibility that the monetary transmission
mechanism itself (the effect of the interest rate
and the exchange rate on output) can change
over time for a variety of reasons.
Therefore it is
vital to monitor this system and ideally to
ensure that any changes to how monetary
impulses are transmitted to inflation are
recognised in the MCI. In practice this may be
difficult to achieve.
measure of monetary conditions in the late
1990s and the early part of the current decade.
Subsequently, the MCI was discontinued from
being published by the BoC (2006), and has
not been used as an input into monetary policy
decisions.
Problems also emerged in New Zealand over
the period when the Reserve Bank of New
Zealand employed the MCI as an operational
target (mid-1997-March 1999).
In particular,
interest rates were increased as an automatic
response to a depreciation of the New Zealand
Dollar (NZ$), with little evidence that those
interest rate increases were warranted.
As a
result, interest rates were increased at a time
when a serious drought caused severe water
shortages in New Zealand, the Asian crisis
evolved (1997/1998) and as output growth in
the country turned negative.
Given the
circumstances, this may not have been the
most appropriate action.
Following the
difficulties encountered, the Reserve Bank of
New Zealand subsequently acknowledged that
they ‘‘were slow to recognise the joint impact of
the Asian crisis and the beginning of an
extended drought through 1997 and early
1998’’. They subsequently discontinued using
the MCI in this capacity.
A further technical issue is whether MCIs
should be calculated in terms of real or
nominal variables.
Theoretically, it would seem
preferable to express the MCI on the basis of
real variables as the real MCI takes account of
inflation movements. It is also generally
believed that rational agents consider the real
rather than nominal rates in their consumption
and investment decisions.
However, there is
evidence that individuals can suffer from
money illusion whereby they consider the
nominal rather than the real variables in their
decision making (Akerloff and Shiller, 2009)
(Fehr and Tyran, 2001). Peeters (1999) and
Gerlach and Smets (2000) also put forward the
A Discussion of the Monetary
Condition Index
74 Quarterly Bulletin 01 / January 10
argument that economic behaviour often reacts
on the basis of nominal interest rates in the
short run. Furthermore, the nominal MCI seems
to be a reasonable approximation for the real
MCI in the short run, in the context of a low
inflation environment. See Costa (2000b) and
the ECB (2002).
There are also other factors justifying the use of
nominal variables.
For example, a nominal MCI
may be easier to construct and is also timelier
as inflation data needed for the real measure
are only available on a monthly basis, as
opposed to the daily availability of nominal
interest and exchange rate data.
However, it
should be noted that in a period of high
inflation, the nominal index is likely to show
more pronounced tightening than the real
indices.
The selection of the MCI components is also
an issue that has received more attention in
recent years.
Since the MCI components
should be in line with the nature of the
monetary transmission mechanism and with the
appropriate structure of the relevant economy,
it has been argued that other factors, such as
long-term interest rates12 and asset prices (i.e.
house prices and stock prices), should also be
included in the MCI.
For the euro area, long term interest rates play an important role in the
monetary transmission mechanism, as
investment and consumption behaviour is often
dependent upon long-term rates.
Taking into account the increasing debate over
the role played by asset prices in the monetary
transmission mechanism, through wealth
effects and balance sheet effects, the Financial
Conditions Index (FCI) has been developed in
recent years.
Policy makers and international
organisations often use the FCI in their
assessment of the monetary policy stance.
However, the definition of FCIs differs across
methodologies. While some researchers
compute FCIs that measure the
tightness/accommodativeness of financial
factors relative to their historical average in
terms of an effective policy rate (e.g. Guichard
12
For countries in which long-term financing relationships play a
major role, it would be logically consistent to include a long-term
interest rate. Fixed long-term interest rates exert a larger
influence on consumption and investment decisions in several
countries in Continental Europe, relative to the Anglo-Saxon
countries (Costa, 2000).
and Turner, 2008),
others measure the
estimated contribution to growth from financial
shocks in a given quarter (Swiston, 2008).
The FCI extends the MCI approach by
including other financial variables, including
stock prices, asset prices and long-term
interest rates13, but similar to the MCI, the index
still suffers from certain criticisms, such as
model dependency, ignored dynamics and
parameter inconsistency.
While a full
discussion on such an index is beyond the
scope of this article, a number of interesting
findings are worth noting.
Based on research at
the BoC, which suggested that asset prices
may offer important information about future
inflationary pressures, Gauthier, Graham and
Liu (2004) estimate a number of FCIs for
Canada.
They find that the FCI outperforms the
MCI in many areas, and also that house prices,
equity prices and bond risk premium, in
addition to short and long-term interest rates
and the exchange rate, are significant in
explaining output in Canada.
Goodhart and
Hofmann (2001), also find that house and share
prices are important variables in such an index
for G7 countries, and that the FCI contains
useful information about future inflationary
pressures.
A more recent example of the FCI’s
use is illustrated in a recent paper by Beaton,
Lalonde and Luu (2009).
It looks at the
development and increasing importance of
financial conditions in the US during the current
crisis.
They find that financial conditions have
had a large negative impact on US GDP
growth in the current recession14 and that the
monetary easing undertaken by the Federal
Reserve over the recent financial crisis has not
been sufficient to offset the tightening of
financial conditions.
A final point related to the selection of the
components is that neither money nor credit
plays a role in standard representations of a
MCI.
For example, the same level of a MCI
could be consistent with various rates of
monetary growth, and in no way calls into
question the importance of the money supply in
13
More recently, lending standards have also been included in
FCIs to account for non-price credit conditions (Guichard and
Turner, 2008).
14 Their FCI suggests that financial factors subtracted between 4
and 7 percentage points from quarterly annualised growth in
2009 Q1.
A Discussion of the Monetary
Condition Index
Quarterly Bulletin 01 / January 10 75
the economy or ultimately the monetary nature
of inflation.
This is particularly relevant when
there are quantity constraints or credit
rationing. Given these shortcomings, the MCI
should be interpreted with caution regardless
of whether it is being used as an operational
target, or merely as one indicator among
many.
3.2 Interpretation Issues
Irrespective of the difficulties in constructing a
MCI, interpreting changes in it in terms of their
significance for current monetary policy is not
easy.
Whether it is appropriate or not for a
central bank to make a policy change in
response to a change in the MCI (in the case
of the MCI being an operational target)
depends on the factors underlying changes in
the components.
A given movement of the MCI
may have different consequences in terms of
the final policy objective.
In particular, it is
important to determine the nature of shocks
causing movements in the exchange rate, and
not mechanically follow movements in
individual components, as highlighted in the
case of New Zealand in Box 2.
Furthermore,
Siklos (2000) believes that the simplicity of
MCIs implies a loss of information when the
effects of the component variables are
aggregated, as it can obscure the movements
of the individual components.
King (1997) also
makes the point that ‘‘any attempt to construct
a simple monetary conditions index is akin to
adding together apples and oranges’’,
particularly given that the exchange rate is not
a policy instrument and therefore MCIs mix
variables that are not of the same nature.
Given the difficulty in determining whether any
particular reference period is ‘‘neutral’’ (Banque
de France Bulletin Digest, 1996), most
implementations focus on changes in the index
compared with previous periods, to ascertain if
monetary conditions have tightened or
loosened, rather than looking at the absolute
levels of the index.
It is important to note that
historical averages do not necessarily
represent neutral conditions and furthermore,
structural changes in the economy and
differences in cyclical conditions may also
affect what is understood as neutral conditions.
4. Constructing the MCIs
The following section focuses on developments
in MCIs for the euro area, the UK and the US
over the past decade.
It is important to
emphasise that the purpose of this section is
not to speculate as to which weights may be
best or even to assess the extent to which the
MCIs portray an accurate picture of the
monetary stance.
For each country, there are many plausible
alternative weights specified by various
institutions and academics.
The choice of the
weights can affect the overall level of the index
and also the rate of change of the indices.
In
this analysis, a weight of 6:1 is used for the
euro area, which is used by the European
Commission15,
and weights of 3:1 and 10:1 are
used for the UK and the US respectively.
The
latter weights have been applied by the IMF in
the past.
In terms of the data used in the
construction of the MCI for each country/area,
the short-term interest rate is proxied by the
three-month money market rate while a broad
trade weighted exchange rate proxies the
exchange rate variable.
These series are then
deflated by consumer price indices16.
Finally,
the base/reference periods refer to the average
of both interest and exchange rates from 1993
to present.
4.1 MCIs in Practice
Referring to Chart 1, it is evident that over the
sample period (1999-2009) for the euro area,
there appears to have been a marked
tightening in monetary conditions post 2005,
which is consistent with increasing interest
rates.
Despite the significant economic
developments since the financial crisis, the
MCI, while volatile, has not shown any
substantial changes in its trend.
Meanwhile, the
MCI for the UK shows its only major shift in
trend from around 2007 on.
At this point both
interest rates and exchange rates contributed
to looser monetary conditions.
The movement
of the US MCI during the sample period has
been more variable, and has tended to track
changes in the interest rate, given this
15 This ratio was derived from simulations of the OECD Interlink
Model. 16 Ex-ante real short-term interest rates were also calculated (using
inflation 3-months forward), but the results were very similar.
Brian Twomey
Taylor Rules Vs Monetary Conditions Index
Forgot to include to the Average Inflation Target article.
The previous model to Taylor Rules was the Monetary Conditions Index. Both were designed to assess where is the appropriate level of the Fed funds Rate yet applies to any nation to determine the correct level of Interest rates.
Fed Funds vs Taylor Rules correct level: 1.207
Taylor Rules to determine the correct rate of the 90 Day Interest rate. 1.94
So 1.20 and 1.94 Vs Headline 0.25 and current overnight Rate 0.08
Taylor Rule Calculations
Target = Inflation + 0.5 X (Inflation – Inflation) +0.5 X (GDP Minus GDP) + Interest (Overnight rate)
Taylor Rules 90 Day Rate
Target = 90 Day Rate + Inflation Target + 1.5 X (Inflation – Inflation) +0.5
Technically the Output Gap supposed to include as the last term but its not necessary.
Monetary Conditions Index
The Monetary Conditions Index gauges the level of the interest rate and Exchange Rate to the Trade Weight Index. Its a fabulous tool and reveals much. See the EUR chart below. We don’t hear about MCI anymore but we hear about Taylor Rules yet its a vital tool.
Monetary Conditions Index EUROPE
Weekly Trades: AUD/USD, USD/CAD, GBP/CAD
AUD/USD
Short anywhere or 0.7381 and 0.7394 to target 0.7163.
Long 0.7163 to target 0.7246
GBP/CAD
Short Anywhere or 1.7498 and 1.7509 to target 1.7291.
Short below 1.7270 to target 1.7187.
Long 1.7291 to target 1.7353.
USD/CAD
Long anywhere or 1.3066 and 1.3044 to target 1.3324.
Long above 1.3371 to target 1.3513.
Short 1.3324 to target 1.3182
Brian Twomey
Average Inflation Targets, GDP and Interest Rates
Fed minutes around the summer of 2019 addressed the concept to allow Inflation to run above and below the 2% target yet this idea was never formalized as a policy until last week’s announcement. The policy of Inflation Targets began as a formal adoption with the RBNZ then Canada, Sweden and a long list of nations. Greenspan and the United States never adopted Inflation Targets. Today, the new concept is Average Inflation Targets.
Average Inflation Targets won the day as an all encompassing policy instead of targeting the Price level. Canada and the BOC for example uses the 2% Target as a midpoint from overall Inflation running from 1 to 3%.
The new policy to Average Inflation Targets is another tool to Keynesian Economics as adopted by Central Banks after the 2008 crash because stimulus and rising balance sheets remains the order of the day.
The Austrians would counter the Keynesian argument by adding and subtracting weekly money into the banking system and allow the Fed Funds rate to roam and trade freely. The ancillary effect is Inflation would remain low and become a true number. What then drives overall Inflation is Money Vs the Fed Funds rate.
Under the stimulus concept and Keynes, central banks add money to the system but never subtract. Central banks faced with piles of money under Inflation to never reach its target and an artificially low overnight rate then began buying bonds. Then came stock purchases to raise inflation then yield control and now Inflation Averages. Soon the central banks will own every market instrument on the planet and become the controller to markets more than has ever been seen in history.
Under Inflation above and below the 2% target or just the 2% target alone, the Fed Funds rate is held artificially low and non moveable. The Fed’s overnight rate or known as the Effective Fed Funds rate has hovered in the 0.08 to 0.10 vicinity for practically everyday for the past year. This explains all central banks as an artificially low overnight rate allows stimulus from now to eternity.
The trap for the fed and central banks after 12 years of Keynesian Economics and stimulus is to allow overnight rates to trade freely. A change to an overnight rate at just 2 and 3 points would cause market volatility and wide price swings to currency prices. Market volatility is contradictory to central banks. Yet stimulus can’t run forever otherwise the economic system will eventually crash.
Traditionaly, Inflation and overnight rates run counter to each other. Low Inflation leads to higher overnight rates and higher GDP. Employment and Wages follow.
Note this relationship.
GDP -5%
Fed Funds 0.08 or headline 0.25.
Inflation rate 1.0 or PCE 1.3.
10 year Yield 0.74
2 year yield 0.13.
Employment Rate 10.2.
Normal arrangement is GDP and overnight rates trade above Inflation rates. Lower goes Inflation then higher for interest rates and GDP. Central banks are working the system backwards by forcing Inflation to trade above interest rates and today, Inflation trades above GDP. In the 1970’s Stagflation, Inflation traded above GDP and interest rates. By forcing Inflation higher leads to lower interest rates and GDP.
From 2008 to current day, Inflation traded above Fed Funds and GDP for the vast majority of time traded below Inflation. Inflation since 2014 trades higher than GDP and Fed Funds. Rather than move the interest rate to rectify the Interest rate Vs GDP situation to allow both to trade higher and contain Inflation at lower levels, Stimulus is added. Add stimulus lowers interest rates and GDP.
Stagflation is defined as Inflation rates above GDP or prices trade higher than output which means a wage earner can’t afford the means to sustain wages to their lifestyle. Items and needs are to expensive. The enemy to GDP, interest rates and economic prosperity is stimulus.
Data was run since Inflation targets began 28 years ago in 1992. The data covers 1992 to 2019 using yearly averages. For Inflation was used average inflation.
The Fed Funds rate average is located 2.61 and oversold at 0.08. The range runs from 0.5 to 4.72.
Inflation averages 2.27 and is oversold from last at 1.0. The range is 1.33 to 3.21.
GDP average is 2.59, oversold and ranges from 1.01 to 4.17.
Fed Funds Vs Inflation correlates to +52%. This means raise or lower Inflation then Fed Funds must follow.
Fed Funds Vs GDP correlates +37%. Raise or lower GDP then Fed Funds follows.
Inflation Vs GDP Correlates +0.007. Under correct positioning, GDP rises forces Inflation lower.
Economies require lower Inflation to 1%, rescind stimulus and allow GDP and Interest rates to rise so allow booming economies.
Brian Twomey
24, 50, 100 and 200 Hour Moving Averages
120 trading days exist per week = 5 day average.
Every trading week begins at a 2 day average and grows by Friday to a full 5 day average. An average = simple. An average requires price data to move and why its called simple.
Averages from Fix prices is mandatory not close prices or averages will mis align to centralbank prices.
Monday =2 day average
Tuesday =3 day
Friday =5 day.
Monday then begins 2 day average again and the process repeats.
A popular bank called Dukascopy posts everyday on popular website its fx forecasts and is wrong everyday it posts to levels, targets and direction. Matches a Glorified retail trader and garners front page status due to bank Name.
Bank uses 50, 100 and 200 Hour MA’s. What are they.
200 Hour MA, barely 8 day average or 192 hours, but an uneven Average
100 Hour MA =Barely 4 day average, but uneven average
60 Hour MA = 2 1/2 day average and uneven again
50 Hour MA= 2 1/4 Day average and uneven
All uneven averages, not good
Difference between 50 and 60 day Average? 1/4 day, or useless
From 50 to 200 = 2 – 8 Day, Duka bank is useless.
24 Hour Averages
I saw a 24 hour average used by a guy but its wrong.
A 24 hour average must start at either the China Open or by the Fed interest rate release in early NY afternoons. I send AUD trade information every trading day by the Fed interest rate release every afternoon and its reliable. I find all trade information from the FED on a 24 hour basis extremely reliable.
The China Open is used to cover actually 11 hours of trading from 9:30 pm EST to the next day ECB at 10:00 am. So 2 averages are running, the 24 hour and 11 hour.
What is actually known from the China open is the support and resistance levels as China might or may not be different from the Fed support and resistance points. With a change of exchange rates from the Fed to China, support or resistance levels normally change and it must be known to most important points to trade for day trades. Accuracy is vital.
AUD, NZD and Asia pairs are quite different from a day trade perspective and for accuracy. The FED at 4:15 afternoons is good but not perfectly accurate.
Why is because Asia pairs, AUD and NZD change interest rates after the China open. A change in interest rates changes support and resistance points. AUD and NZD must record and enter new interest rates then factor the exchange rate for accurate support and resistance points. This is done every morning.
When AUD, NZD and Asia pairs trade in Europe and America trading, Asia markets are closed so support and resistance points are good until the next interest rate release after the China open. its a true 24 hour indicator but the times must factor correctly or support and resistance points won’t be accurate.
Many Fix prices are seen every trading day, 13 are major fixes then comes interest and exchange rate fixes directly from the respective central bank. Each fix price is different and its imperative to trade day trades by the correct Fix price and to know the exact support and resistance points. Its a full time job but it depends to trade correct times.
So a blanket, all encompassing 24 hour MA is not reliable as a trade indicator. Because support and resistance points are not known. Then comes ranges. Every currency pair has a different range and ranges may change. Current ranges are fairly stable for day trades but 1 month or 1 week from today is not known to ranges.
Fx is not an easy job as much must be known. And this takes many years to truly understand what’s going on, how to trade and the many changes required throughout any given trading day. My estimation is 1% have the knowledge, and 99% don’t care outside of entry and target. But the 1% spent the many years to understand.
Brian Twomey
FX Articles Today
Brian Twomey
USD/CAD: Weekly Trade Results
Long 1.3123 and 1.3101 to target 1.3351
Open price Sunday 1.3169
Lows 1.3133 Highs 1.3238
Long way to target
Trade posted Sunday
Swissquote Bank Research team as posted on Fxstreet this morning. USD/CAD: The Downside Prevails
https://www.fxstreet.com/analysis/usd-cad-intraday-the-downside-prevails-202008240711
Dukascopy Bank team as posted this morning on Fxstreet. USD/CAD Decline likely to Continue
https://www.fxstreet.com/analysis/usd-cad-analysis-decline-likely-to-continue-202008241144
This is what banks offer these days as they turned into failed retail forex signal services.
Brian Twomey
Weekly Trades: USD/CAD, NZD/JPY, NZD/CHF
The RBNZ informed to the possibility to negative interest rates. OCR dropped massively from 0.20 to 0.05 on the announcement and now at 0.06. With a headline interest rate at 0.25, the RBNZ has miles upon miles to go before negative interest rates are considered.
Not in 1 written paper from the RBNZ has negative interest rate been considered over the past 8 and 10 years. On the announcement to go negative, the RBNZ effectively had an interest rate drop but done through the overnight rate rather to headline.
The effective rate drop is credited and categorized as Forward Guidance and an overall Monetary tool used by all central banks.
The RBNZ actually states not an interest to negative interest rates but this quote “Therefore, once deposit rates are close to zero, lowering the OCR further may lose effectiveness as cuts would not significantly lower bank funding costs.”
Further quote: NZDUSD The New Zealand dollar exchange rate is heavily influenced by offshore developments, particularly relative interest rates.
RBNZ sets the interest rate standard for the entire world after the Fed reports their own interest rates every afternoon. The RBNZ can’t go negative as the RBNZ prices its interest rates from the FED then all nations price own interest rates from the RBNZ. Its a daily 24 hour rotation and works on every trading day.
Since the OCR drop, NZD/USD failes to correlate to its current interest rates and is operating at -83%. This is day 2 since the drop and NZD/USD as well as all NZD pairs must correlate to its interest rates. This is mandatory as an exchange rate cannot trade correctly in markets without a positive correlation to its interest rates. This means means NZD must adjust.
As stated many times, an interest rate change by a central bank takes 5 days to normalize. We’re on day 2 and 3 days to go.
Weekly Trades
NZD/CHF is a problem pair to the NZD universe due to negative correlations to NZD/USD. But we’re going with it this week. From the CHF universe, GBP/CHF has been the big winner over the past few weeks.
USD/CAD
Long 1.3123 and 1.3101 to target 1.3351.
Long above 1.3407 to target 1.3549.
Short 1.3549 to target 1.3476.
Short 1.3351 to target 1.3276
NZD/JPY
Long 68.47 and 68.38 to target 69.03.
Long above 69.22 to target 69.94.
Short 69.94 to target 69.40.
Short 69.03 to target 68.03
NZD/CHF
Long 0.5949 and 0.5935 to target 0.6015.
Long above 0.6028 to target 0.6081.
Short 0.6081 to target 0.6054.
Short 0.6015 to target 0.5975.
Brian Twomey
Correlations: 26 Currency Pairs
A correlation is a unitless measurement alongside a mathematical reading from +1 to -1. Unitless means Correlation numbers flow through prices and change based on the level of prices. The answer to a particular Correlation between and among currency pairs is which currency pairs hold a positive association and which pairs are negative.
The Correlation measurement is an evaluation of prices between and among currency pairs but more specifically, its an assessment to moving averages as moving averages are the driving force behind currency price movements.
A positive Correlation relationship informs prices and moving averages are correctly aligned while a negative alliance informs problems exist among counterpart prices and averages. The price level maybe to high or to low in relations to partner currencies.
The final determination then assesses not only multiple trades but which pairs are problems in relation to counterpart currencies. Troubled pairs without acceptable Correlations are un tradeable and must be excluded from trade consideration.
Correlations further examines not only overall normal and non normal currency market prices but a problem may exist within a group of currencies such as EUR/USD and its cross pairs.
Correct is EUR/USD must correlate to all cross pairs to determine a normal functioning group. Likewise to GBP/USD and cross pairs, AUD/USD and cross pairs, NZD/USD and cross pairs.
USD
USD/CAD Vs USD/CHF +96%
USD/CAD Vs USD/JPY +92%
USD/CHF Vs USD/JPY +98%.
USD currency pairs are not only running strong and perfect but multiple trades exist.
GBP/NZD
GBP/NZD is a deeply toubled pair between and among counterpart currency pairs as follows:
GBP/NZD Vs GBP/USD +29%. Low.
GBP/USD Vs NZD/USD +82%.
GBP/NZD Vs NZD/USD -29%.
GBP/NZD barely reveals a pulse to current prices and averages and to main counterparts which means GBP/NZD prices are to high or low in relation to GBP/USD and NZD/USD because of the positive correlation between NZD/USD and GBP/USD.
GBP/NZD Vs EUR/NZD
GBP/NZD Vs EUR/NZD +53%.
Both are considered the same currency pair and both conceivably supposed to move together in tandem but its not true.
GBP/NZD Vs USD
Here’s the question: If GBP/NZD lacks a correlation to main counterparts then does GBP/NZD transform and trade as a USD pair is an incorrect statement. GBP/NZD belongs in the GBP/USD universe and must correlate to GBP/USD but at certain instances, GBP/NZD will correlate to NZD/USD. Here’s proof to the USD statement.
GBP/NZD Vs USD/CAD -19%
GBP/NZD Vs USD/CHF -4%
GBP/NZD Vs USD/JPY +2%.
Can GBP/NZD ever transform and trade exactly as USD by correlations is not true at this current evaluation. We can check, assess and prove this statement by AUD/NZD and EUR/NZD.
AUD/NZD V USD
AUD/NZD Vs USD/CAD -94%
AUD/NZD Vs USD/JPY -97%
AUD/NZD Vs USD/CHF -97%
EUR/NZD Vs USD
EUR/NZD Vs USD/CAD -84%
EUR/NZD Vs USD/JPY -81%
EUR/NZD Vs USD/CHF +62%
Current EUR/NZD to EUR/USD correlates 83% and EUR/NZD correlates 62% to USD/CHF. This situation is a severe problem and explains why EUR/NZD and GBP/NZD as the same pair only correlates +55%. Both should correlate at least +80% to +90%.
GBP/NZD Vs AUD/NZD
GBP/NZD Vs AUD/NZD +0.09 %.
GBP/NZD Vs EUR/NZD and AUD/NZD
GBP/NZD fails to not only correlate to GBP/USD and NZD/USD but GBP/NZD fails to correlate within its group Vs EUR/NZD and AUD/NZD. Clearly a troubled currency pair.
EUR/NZD The Better Trade by Correlations
EUR/NZD Vs EUR/USD +83%
EUR/NZD Vs NZD/USD +55%
EUR/USD Vs NZD/USD +55%
EUR/NZD strong positive correlation to EUR/USD reveals EUR/NZD will move alongside EUR/USD but also EUR/NZD operates correctly within the EUR/USD set of cross pairs. The problem comes when EUR/NZD correlates +62% to USD/CHF. This situation leaves EUR/NZD paralyzed and possible to trade erratic prices.
GBP/NZD Vs EUR/NZD
GBP/NZD shortest term is slightly overbought but deeply oversold just past its 10 year average. EUR/NZD is overbought shortest term and overbought past its 10 year average.
AUD/NZD Correct Correlations
AUD/USD Vs NZD/USD +96%
AUD/NZD Vs NZD/USD +85%
AUD/NZD Vs AUD/USD +96%
AUD/NZD Vs EUR/NZD +87%
AUD/USD correlates to NZD/USD and vice versa due to underlying RBA interest rates.
AUD/USD Vs RBA Interest Rates
AUD/USD Vs Interest Rates +96%
NZD/USD Vs RBNZ Interest Rates
Here’s where markets get interesting as the RBNZ just lowered interest rates and a drop was seen from 0.20 to 0.06 upon the RBNZ statement. Correlations are off and negative which means the NZD/USD price must align to its current interest rates. We’re 2 days into the drop and interest rates remain negative to NZD/USD. Normally its a 5 day process to align interest to exchange rates.
NZD/USD Vs RBNZ interest rates -83%
NZD/USD
NZD/USD Vs NZD/JPY +96%
NZD/USD Vs NZD/CAD +67%
NZD/USD Vs NZD/CHF -28%.
NZD/USD correlates and moves together vs NZD/JPY and NZD/CAD but lacks a correlation to NZD/CHF which means a big price adjustment wil be seen to NZD/CHF. Yet all NZD must adjust to its new interest rate.
CHF Correlation as Problem
GBP/USD Vs GBP/CHF -98^
NZD/USD Vs NZD/CHF -28%
AUD/USD Vs AUD/CHF +91%
EUR/USD Vs EUR/CHF =98%
USD/CAD Vs CAD/CHF +78%
Troubled pairs are GBP/CHF and NZD/CHF as both bolted from the GBP and NZD universe.
CHF
USD/CHF Vs GBP/CHF +67%
USD/CHF Vs NZD/CHF +64%
GBP/CHF amd NZD/CHF moves together with USD/CHF.
Overall Currency Markets
GBP/USD Vs USD/CAD -98% and healthy
Brian Twomey
Weekly Trades: 18 Currency Pairs
Current week 18 weekly trades and traded entries to targets perfectly. A 17 year process of building on statistics to ever more perfection. Today’s markets are far from traded markets in the old days. I challenge anyone to not only trade as perfectly as me but to and build accounts continuously over years. The object to trades is set entry and targets on Sunday and take profits during the week and without worry. This has been the way for nearly 5 years so not to become 24 /7 screen watchers. Last month has been a bit erratic yet we’ve done well and maintained.
We trade each pair continuously throughout the week by longs and shorts at specific entry and target points as the trade set up allows. Certain pairs trade only one way. Each week is different to the pairs.
The profit potential per week is easily 1000 to 1500 pips and much more on good weeks.
Below is what is offered per week. I don’t take on new traders. I have traders been with me for many years and this is what is sought as well as traders with a certain degree of experience. And for traders who live busy lives outside of markets. Because I grow accounts exponentially.
A special pair not offered is gladly sent. EM pairs are traded and offered upon request.
Favored trades are ranked from best to worst. EUR/USD entry missed by 52 pips yet profit +152 pips. Note perfect trades this week: EUR/JPY, CAD/JPY, NZD/CHF, EUR/AUD, AUD/JPY, AUD/CHF, GBP/CHF, NZD/USD, GBP/AUD, GBP/CAD.
Note GBP/NZD on bottom of GBP favored list. I knew GBP/NZD wouldn’t trade correctly and this was a good call.
The trades
Favored trades this week: EUR/USD, EUR/JPY, EUR/NZD, USD/CAD, CAD/JPY, NZD/CHF, EUR/AUD, AUD/JPY, AUD/USD, AUD/CHF, NZD/JPY, NZD/USD
EUR/USD. Break Point 1.1501, below targets 1.1215.
Strategy. Short 1.1894 and 1.1912 to target 1.1644. Must cross 1.1858, 1.1822, 1.1786, 1.1750, 1.1714 and 1.1678. Cautious long 1.1644 to target 1.1786. Long only strategy.
EUR/JPY. Break Point 122.86, below targets 120.56.
Strategy. Short 126.30 and 126.58 to target 124.57. Must cross 126.02, 125.74, 125.46, 125.18, 124.90 and 124.62. Cautious long 124.57 to target 125.18. Long only strategy.
EUR/NZD. Break Point 1.7716, below targets 1.7554.
Strategy. Short anywhere or 1.8101 and 1.8111 to target 1.7837. Must cross 1.8061, 1.8021, 1.7981, 1.7941, 1.7901 and 1.7861. Weekly strategy.
USD/CAD. Break Point 1.3462, above targets 1.3603.
Strategy. Long 1.3212 and 1.3194 to target 1.3435. Must cross 1.3247, 1.3282, 1.3317, 1.3352, 1.3387 and 1.3422. Long above 1.3462 to target 1.3603. Cautious short 1.3435 to target 1.3319. Short only strategy.
CAD/JPY. Break Point 79.39, below targets 78.78.
Strategy. Short anywhere or 80.38 and 80.50 to target 79.52. Must cross 80.13, 79.89 and 79.64. Short below 79.39 to target 78.78. Must cross 79.27, 79.15 and 78.89. Long 78.78 to target 79.21. Long only strategy.
NZD/CHF. Break Point 0.6054, above targets 0.6106.
Strategy. Long anywhere or 0.5949 and 0.5938 to target 0.6038. Long above 0.6054 to target 0.6106. Must cross 0.6075 and 0.6096. Short 0.6106 to target 0.6075. Long only strategy.
EUR/AUD. Break Point 1.6511, above targets 1.6671.
Strategy. Long 1.6432 and 1.6416 to target 1.6485. Must cross 1.6447, 1.6462 and 1.6477. Long above 1.6511 to target 1.6671. Must cross 1.6526, 1.6541, 1.6556, 1.6571, 1.6586, 1.6601, 1.6617, 1.6631, 1.6647 and 1.66 2. Short 1.6671 to target 1.6574. Cautious short 1.6485 to target 1.6385.
AUD/JPY. Break Point 74.44, below targets 72.70.
Strategy. Short 76.92 and 77.05 to target 75.10. Must cross 76.70, 76.48, 76.26, 76.04, 75.82, 75.60 and 75.38. Long 75.10 to target 76.17. Long only strategy.
AUD/USD. Break Point 0.6970, below targets 0.6868.
Strategy. Short 0.7226 and 0.7239 to target 0.7073. Must cross 0.7201, 0.7176, 0.7151, 0.7126, 0.7101 and 0.7076. Long 0.7073 to target 0.7149. Long only strategy.
AUD/CHF. Break Point 0.6497, below targets 0.6408.
Strategy. Short 0.6581 and 0.6598 to target 0.6514. Must cross 0.6564, 0.6547, 0.6531 and 0.6522. Short below 0.6497 to target 0.6408. Must cross 0.6480, 0.6464, 0.6447 and 0.6430. Long 0.6408 to target 0.6447. Cautious long 0.6514 to target 0.6564. Long only strategy.
NZD/JPY. Break Point 69.36, below targets 68.52.
Strategy. Short 70.21 and 70.42 to target 69.57. Must cross 69.99 and 69.77. Short below 69.36 to target 68.52. Must cross 69.14, 68.92 and 68.70. Long 68.57 to target 70.09. Cautious long 69.57 to target 70.21. Long only strategy.
NZD/USD. Break Point 0.6493, below targets 0.6389.
Strategy. Short 0.6598 and 0.6612 to target 0.6508. Must cross 0.6584, 0.6570, 0.6556, 0.6542, 0.6528 and 0.6514. Short below 0.6493 to target 0.6389. Must cross 0.6479, 0.6465, 0.6451, 0.6437, 0.6423, 0.6409 and 0.6395. Long 0.6389 to target 0.6448. Cautious Long 0.6508 to target 0.6567. Long only strategy.
GBP
Favored trades this week: GBP/USD, GBP/JPY, GBP/CHF, GBP/NZD, GBP/AUD, GBP/CAD.
GBP/USD. Break Point 1.2832, below targets 1.2623.
Strategy. Short 1.3132 and 1.3146 to target 1.2884. Must cross 1.3106, 1.3080, 1.3054, 1.3028, 1.3002, 1.2976, 1.2950, 1.2924 and 1.2898. Long 1.2884 to target 1.2989. Long only strategy.
GBP/JPY. Break Point 137.11, below targets 136.30.
Strategy. Short anywhere or 139.48 and 139.67 to target 137.50. Must cross 139.08, 138.68, 138.28 and 137.88. Long 137.50 to target 138.28. Long only strategy.
GBP/CHF. Break Point 1.1966, above targets 1.2071.
Strategy. Long 1.1833 and 1.1820 to target 1.1940. Must cross 1.1859, 1.1885, 1.1911 and 1.1937. Long above 1.1966 to target 1.2071. Must cross 1.1992, 1.2018 and 1.2044. Short 1.2071 to target 1.2019. Cautious short 1.1940 to target 1.1886. Long only strategy.
GBP/NZD. Break Point 1.9771, below targets 1.9669.
Strategy. Short 2.0026 and 2.0038 to target 1.9847. Must cross 2.0001, 1.9976, 1.9951, 1.9926, 1.9901, 1.9876 and 1.9851. Long 1.9847 to target 1.9924. Weekly strategy.
GBP/AUD. Break Point 1.8429, above targets 1.8599.
Strategy. Long 1.8172 and 1.8151 to target 1.8365. Must cross 1.8214, 1.8256, 1.8298 and 1.8340. Short 1.8365 to target 1.8258. Weekly strategy.
GBP/CAD. Break Point 1.7267, below targets 1.7156.
Strategy. Short 1.7406 and 1.7420 to target 1.7281. Must cross 1.7378, 1.7350, 1.7323, 1.7309 and 1.7295. Short below 1.7267 to target 1.7156. Cautious long 1.7281 to target 1.7350. Weekly strategy.
Brian Twomey brian@btwomey.com
GBP/JPY and EUR/NZD Trade Results
As stated in the Aug 16 weekly outlook, EUR/USD required a break of 1.1977 to move higher. EUR/USD traded to weekly highs at 1.1964 then dropped. DXY requires a break higher at 93.52 to trade 93.52 to 95.70.
Further to weeklies, overbought JPY cross pairs would all drop. All dropped. NZD/JPY faces its do or die break point at 69.22 and currently trades 69.21.
Deeply oversold NZD/CHF trades below its vital high/ low point at 0.6031. If NZD/JPY breaks below 69.22 then NZD/USD 0.6485 becomes the target break for lower. But also the signal to EUR and GBP to trade far lower. Current NZD/USD trades 0.6529.
More, NZD/CHF lomg was the trade for the week and NZD/CHF traded directly to its vital point at 0.6034. GBP/CHF long traded 200 pips higher.
AUD/USD as mentioned remains neutral. Neutrality for AUD/USD is due to EUR/AUD vital high /low point at 1.6519 and AUD/EUR at 0.6056 or EUR/AUD 1.6512. AUD/USD is ready for the bigger move on resolution of EUR/AUD and AUD/EUR. A EUR/AUD break higher then AUD/USD and AUD/EUR trade lower and higher if EUR/AUD breaks lower. AUD/USD and AUD/EUR run together and its imperative to travel as one currency pair.
EUR/AUD correlations run -64% Vs EUR/USD which means EUR/AUD runs +64% to AUD/USD. AUD trades correctly but requires a resolution to EUR/AUD.
Lower for the week to GBP and GBP traded lower.
The extent to our weekly trades is to trade 18 currency pairs and its our way for many years.
Prices for the vast majority of 28 currency pairs are trading at fairly normal levels again after an abnormal month. Slight uncertainty remains Vs a few currency pairs but overall, we’re nearly back to complete normality.
Weekly Trade Results
GBP/JPY
Short anywhere or 139.48 and 139.67 to target 137.50
Highs 139.96, Lows 138.56
Trade runs +111 pips
EUR/NZD
Short anywhere or 1.8101 and 1.8111 to target 1.7837
Highs, 1.8190, Lows 1.7952
Trade from 1.8111 runs +159 pips.
2 trades, 270 pips
EUR/NZD joins the ranks to an abnormal currency pairs as overbought 1.8111 travels to higher overbought. Abnormal refers to trading to extremes and rare days for currency prices overall.
Brian Twomey
Trade Results: USD/TRY, USD/PLN, USD/RON
USD/TRY Weekly Trade
USD/TRY for the past 2 weeks represents the gift that keeps on giving. USD/TRY remains deeply overbought short, medium and long term. USD/TRY could easily achieve a low 6.000’s exchange rate.
Short 7.3956 and 7.4123 to target 7.2284. Better target 7.1949
Highs 7.4016, Lows 7.2062
Trade ran +`1954 pips.
USD/PLN
Long 3.6853 and 3.6988 to target 3.7668. Better target 3.7939.
Lows 6.6637, Highs 3.7214
Trade runs from 3.6853 + 361 pips from 3.6852
Long way to target
USD/RON
Long 4.0652 and 4.0780 to target 4.1290. Better target 4.1546.
Lows 4.0426, Highs 4.0922
Trade Runs +270 pips
3 trades, 3 days +2585 pips
1 lot was added to USD/PLN and USD/RON at the lows.
USD/PLN
Open Monday at 3.7127 and entry at 3.6853. Traders could’ve easily taken this trade short to 4.6853 for 300 ish pips then reverse long and trade to target or to a satisfactory exit level. The same opportunity existed for USD/RON.
USD/RON opened at 4.0830 and traded to lows to entry at 4.0652 and lows at 4.0426. Traders could’ve easily traded USD/RON short for 300 ish pips then reversed long and trade to target or to a satisfactory exit level.
Brian Twomey
5 and 10 year Averages: 18 Pair Update
EUR/USD 10 year average is located at 1.2179. A break higher then range becomes 1.2179 to the 14 year average at 1.2657. Next levels 1.2040 1.2113, 1.2186 and 10 year at 1.2179. Massive resistance at 1.2179 and 1.2186.
EUR/JPY 5 and 10 year averages as follows: 124.91 and 123.35 then the 14 year at 129.17.
EUR/CHF 5 year average 1.1084.
EUR/AUD, EUR/CAD and EUR/NZD all trade far above 5, 10 and 14 year averages.
GBP/USD 5 year average 1.3237
GBP/JPY and GBP/CHF trade below 5, 10 and 14 year averages.
GBP/AUD 5 year average 1.8220. A break higher targets 1.8611.
AUD/USD 5 year average 0.7281. Must break 0.7243 and 0.7369. Massive resistance point located at 0.7295.
AUD/JPY and AUD/CHF trade below 5 and 10 year averages.
AUD/NZD ranges between 5 and 10 year averages at 1.0700 and 1.1357
AUD/CAD confluence between 5 and 14 year averages at 0.9582 and 0.8593 then next comes the 14 year at 0.9817.
NZD/USD, NZD/JPY and NZD/CHF all trade comfortably below 5, 10 and 14 year averages.
NZD/CAD is key to NZD/USD as the 10 year average is located at 0.8686
USD/CAD 1.3190 is today’s 5 year average and VS GBP/USD at 1.3237. Do or die is upon us.
CAD/JPY 83.93 at the 5 year average.
USD/CHF 10 year average 0.9541 and miles oversold.
Brian Twomey
Joseph Tevisani: Economic Backward View
Good example to the backward economic view masqueraded as a forward perspective to tomorrow’s FOMC. Mr. graduate of elite Columbia University brings nothing, says nothing and reveals no actionable information. After reading this, is anybody more prepared for FOMC, is anyone ready and able to understand what ‘s coming tomorrow. No.
Who is the audience for such an article. New and inexperienced traders as this is the target assembly. Fxstreet reports trade experience levels of readers at 1 to 3 years. Most are new traders and many blow accounts and disappear then comes the new crowd of new traders. This process never ends. And explains why articles of this type are accepted.
Also explains the Blake Morrow, Pipczar types and how fxstreet trade service remains a viable entity today despite losses since inception beyond comprehension. The target audience for trade services are these new traders. Because new traders constantly disappear, its imperative for trade services to repeatedly post to entrap and reap subscription benefits. The competition for new traders is fierce as many trade services post articles in order to find suckers.
Interesting though to trade service articles is the commonality to write about a currency pair, show a chart but say nothing. And this is the way the vast majority post articles.
Preparation for FOMC is a must to read past minutes and statement in order to know exactly what the fed is doing and how they wish to accomplish monetary goals. The picture is crystal clear but if the audience is new traders then why bother.
- Edited minutes of the July 28-29 FOMC meeting.
- Fed funds rate and emergency programs unchanged.
- Any mention of yield curve control is a negative for the dollar.
- Markets looking for indications of long term economic view.
The Federal Reserve was the earliest government agency to act on the coronavirus pandemic. The bank’s rate and loan programs enacted in March have helped to mitigate the effects of the shutdowns that devastated the economy and produced the worst unemployment since the Depression.
Fed funds rate
FXStreet
Since that intervention the Fed has maintained its policies, using bond purchases to push mortgage rates to their lowest levels on record but has eschewed other action while warning of the long-term impacts of the pandemic.
Markets are chiefly concerned about the governors’ forward view. Employment and economic growth are the Fed’s main concerns, followed at a discrete rhetorical distance by inflation.
Pessimistic optimistic or neutral whatever light the minutes can shed on the FOMC’s future sight will be taken as pronouncements by the trading markets.
Employment and growth
The dismal tale of the shutdown crash of employment is well known. Over 22 million American lost their jobs in March and April in the non-farm payrolls accounting. About 42%, just more than 9 million have since been rehired. The losses were heaviest among hourly and lower wage workers the same labor groups that before the pandemic had some of the lowest unemployment on record and the highest wages gains in a generation.
Non-farm payrolls
FXStreet
Growth collapsed in the second quarter falling at an unheard of 32.9% annualized rate. The prospective recovery in the July, August and September, as charted by the Atlanta Fed’s GDPNow program has jumped from 11.9% in its first estimate to 26.2% in its August 14th version.
Inflation
Inflation has been for a decade and more the step-child of Fed policy as the Fed focused on recovery from the financial crisis and recession. The crash in consumer demand as most Americans were locked in their homes in March and April drove prices into reverse. Their partial revival has been a function of returning demand rather than any reflationary efforts by the central bank.
CPI
Minutes and markets
The FOMC are edited productions designed to enhance and elucidate current Fed policy. All of the Fed’s three main concerns, growth, employment and inflation, are answerable to the same policy: lower interests rates.
There is one areas in which the minutes may provide useful clues to future Fed decisions. How serious is the discussion of yield curve control, the extension of control to longer term interest rates?
Yield curve control, or as we call it, Y2C, was not mentioned in the FOMC statement or by Chairman Powell in his prepared statement or in the news conference. If there is any serious consideration it will show here. If the topic is more than academic it will be a sign that the governors are more worried than they have let on and will not bode well for the dollar.
Brian Twomey
Brian Twomey V AUD/USD Pivot Points
Pivot Points seems a popular trading indicator for the retail crowd. Given 0.7202 to my assumption is a middle equilibrium line then 3 support and resistance points. I believe the calculation is high/ low then divide by close. Today’s Pivot Points were lifted from some guy’s article at fxstreet. Let’s look first at 0.7202 as the Pivots Points are off.
-
- 0.7303
- 0.7265
- 0.7240
- 0.7202
-
- 0.7177
- 0.7139
- 0.7114
AUD/USD Day Trade Today
AUD/USD
Most Important 0.7196 and 0.7221 Vs 0.7229, 0.7234, 0.7238, 0.7243, 0.7252, 0.7257 and 0.7262
Bottom. 0.7188 achieves by 0.7206 and 0.7197
Upper target 0.7262
Continuation fail 0.7243
Pivot 0.7202 Vs is at today’s AUD bottom but not equilibrium. The equilibrium line is higher by about 25 ish pips.
The upside at 0.7243 and 0.7262 is close to 0.7240 and 0.7265. Pivots are off by 3 pips.
The bottom Pivot Point support stops at 0.7114 but its vital to consider 0.7080 and 0.7029 especially for a weekly trade and its most vital to normal traded markets. Our weekly lower target this week for example is well below 0.7114.
0.7183 is dead center neutral Vs 0.7177 at R1 Resistance. And 0.7183 dead center neutral is 19 pips off from 0.7202 equilibrium. Pips matter as every traded pip represents money and we don’t want to miss capture of money.
My 0.,7286 and Pivot 0.7265 must highlight and not seen is the 5 year average at today’s 0.7281. If 0.7281 breaks and sustains then a brand new upward trend exists and nullifies the upper Pivot at 0.7303. My point at 0.7389 becomes next target area.
A failure at 0.7281 and an overbought price for today then AUD trades much lower to again focus on 0.7183.
Overall, AUD is slowly pushing higher against a severely overbought trend. Over time, as can be seen, AUD will trade miles lower and 0.6800 and 0.6700’s are good eventual longer term targets.
One of the big four banks days ago wrote a 0.6400’s AUD target. From current levels, 0.6400’s is insanity and most especially because AUD averages have been moving higher. For the past almost 2 weeks, AUD averages became dead which means they stopped moving. Moment of truth is here. if AUD averages begin moving lower then good bye to a higher AUD.
Then what happens is the banks’ target at 0.6400’s will begin to move higher along the price path but it must move to at least the current 0.6700’s position.
My points look ahead by many miles compared to Pivot Points. My Points are updated daily. Updated daily may mean multiple times per day. For a central bank announcement, my points calculate new trades specific to cover any central bank decision. Trades are known before the announcement.
The Brexit vote 3 years ago was a specific calculation to the event as was past election results.
However, daily trades are factored by interest rates and may or may not apply to below points.
This comparison is not to disparage Pivot Points but only to analyze its accuracy and overall determination to trades. I always wondered how my points relate to today’s trading indicators.
| Plus | Minus | |
| 0.7029 | ||
| 0.7080 | 0.6874 | |
| 0.7183 | 0.6771 | |
| 0.7286 | 0.6668 | |
| 0.7389 | 0.6565 | |
| 0.7492 | 0.6462 | |
| 0.7595 | 0.6359 | |
| 0.7698 | 0.6256 | |
| 0.7801 | 0.6153 |
Brian Twomey
Blake Morrow, PipCzar: Dumb as a Rock
Pip czar is head of this big trade service with brother dale. He sets up tables at money shows to reel n unsuspected customers. And is head man at Chris Weston’s webinars at Pepperstone. For Pip Czar, its a no lose deal. For customers, complete loss.
Chart of the day is the latest innovation to many of the leading names out there. Its the usual cabal of leading names ganging up on the unsuspected retail crowd. yet all names are complete losers in the Boris Schlosssberg and Kathy lien crowd.
The commonality to writings is words say absolutely nothing nor do charts specify anything. Its not the Blake Morrow crowd alone as this bottom post is typical to what is seen at fxstreet and investing dot com.
1 hour says, 4 hour says, Fib says, a non accurate Ma says. Then comes the coulda, woulda, shoulda. Looks like. Its possible, probability. Don’t forget the backwards information as Covid, past retail sales, Fed Man said.
In the end, today’s FX contains millions of market and currency pair posts that say nothing and reveal an equally non revealing chart.
How dumb is Blake Morrow is shown below
The USD/CAD turned from the 1.3400 level today and that was important price action. The reason: It was major channel resistance from the March highs. This is significant as it suggests that a break above the 1.3400 level could kickstart a squeeze back towards the 200dma. Two other things you should note: 1) The pair put in a false breakdown last week below the 1.3310 level. 2) As other major currencies have rallied substantially against the USD in recent weeks, the underperformance of the CAD is noticeable. If you are long CAD in some form, you are probably well aware of this, especially against the USD. If you put all this information together, the risk of a USDCAD upside move is building.
Brian Twomey
Weekly Trades: GBP/JPY, EUR/NZD, USD/PLN, USD/RON, USD/TRY
Week 2 to overbought all JPY cross pairs and we’ll run again with GBP/JPY. Overbought EUR/NZD offered about +177 pips last week but 1.7600’s target failed to achieve. Entry short to EUR/NZD doesn’t matter to offer the degree of overbought. Entry short to GBP/JPY hardly matters as well.
EM trades last week earned +7000 ish pips. BRL and TRY achieved targets and both offered re shorts for many extra pips. EUR/ZAR target at 20.4000 achieved 20.4100 lows from 20.8300’s. USD/MYR and USD/RON each earned + 200 ish pips. Both are the same exact currency pair as both contain a 4.000 exchange rate.
USD/PLN wasn’t offered last week because its price position wasn’t ready for a viable trade. This week, USD/PLN is in a far better position and we’ll run with it this week. USD/TRY remains the gift that keeps on giving as it begins the week overbought from 7.37 and the same short trade from last week.
EUR/NZD
Short anywhere or 1.8101 and 1.8111 to target 1.7837
GBP/JPY
Short anywhere or 139.48 and 139.67 to target 137.50
Long 137.50 to target 138.28
USD/PLN
Long 3.6853 and 3.6988 to target 3.7668. Better target 3.7939.
USD/TRY
Short 7.3956 and 7.4123 to target 7.2284. Better target 7.1949
USD/RON
Long 4.0652 and 4.0780 to target 4.1290. Better target 4.1546.
Brian Twomey
BRIAN TWOMEY ON TRADING 
1. Never an actual trade reported with entry and target.
2. Upside Could be, Looks like, Probably, if this then that
3. Downside. Could be, Looks like, Probably, if this then that
4. 4 hour chart. This is mandatory, or maybe 15 minute, don’t know why.
5. Must post chart with crazy drawings for verification
6. Must mention Fib level
7. Must contain yesterday’s useless information
8. 1.3200 = Psyco level, Psychological level, the Figure, useless information.
9. Swing High or Low. Didn’t know prices swing
10. Must mention day’s events, useless but mention covid19 or today’s jacksonhole or centralbank speaker. m
11. Maybe offer useless technical level from pivot point or recent high or low