Investing Archives - Page 4 of 80

(Some) Money Markets Float On this October

The weighted average of the Fed funds rate has edged higher. Following the Fed hike in December 2015, the Fed funds average around 36 bp in January before moving into a 37-38 bp range. However, since the UK referendum it has been trading consistently around 40 bp.

The Fed fund futures contract settles at the average effective Fed funds rate for a given month, not at the policy rate. Ahead of next week’s FOMC meeting where practically no one expects a change in policy, implied yield of the July Fed funds futures contract is 40.25 bp.

The Currently Weird Connection between Foreign Exchange and Monetary Policy

Monetary policy is said to have lost its impact on the foreign exchange market, as investors scratch their heads at the resilience of currencies with negative interest rates. Yet the price action in the action cannot be understood without recognizing the ongoing importance of monetary policy expectations.

Divergence between the U.S. and other Economies Keeps Dollar Bull Case Alive

Our underlying constructive outlook for the US dollar remains intact. It is broadly based on the divergence between the US and most other major economies. The US acted early and aggressively to counter the Great Financial Crisis. Unorthodox policies, such as quantitative easing, were adopted years before the ECB and BOJ. This has produced different outcomes. US economic growth may not be impressive by pre-crisis standards, but it does not seem particularly fragile.

CFTC: From the Long to the Short of It

The combination of a robust US jobs report, speculation of bolder action by Japan, the possibility that the ECB drops the capital key to overcome the ostensible shortage of some core bonds (e.g. German bunds), and the anticipation of easier BOE policy appears to have generated a change in sentiment among speculators in the currency futures market.

Other Currencies Matter

The US dollar is easily the most traded currency, and despite the plethora of other currencies, it is on one side of nearly 90% of all trades. Yet the movement in the foreign exchange market presently is not so much driven by the dollar, as it is other currencies.

When is a Bottom a Bottom?

With the Bank of England apparently surprising the market more than one might have expected, given the split surveys, many are thinking sterling has bottomed.

If it has bottomed, where could it go? A number of technical considerations suggest toward $1.4200.

Three technical considerations point to that area. The Great Graphic here created on Bloomberg shows the 61.8% retracement of the Brexit fall is found near $1.4170. The 100-day moving average is $1.4195.

CFTC: Currency Speculators still on the Dollar Sidelines

The UK voted to leave the EU. The German and Japanese yield curve is negative out through 15 years. The entire Swiss curve has negative yields. There is little doubt that the US economy was recovering from a soft six-month stretch even before the recent string of data. Even then, speculators in the futures market mostly added to foreign currency exposures.

Is the Yuan Really Weak?

Here are two Great Graphics that portray two time series: the dollar-yuan exchange rate and the yuan against a trade-weighted basket. The first chart comes from a highly reputable consulting firm. It replicates the trade-weighted basket that Chinese officials unveiled and shows how it would have performed in the past.

Life in the Slow (Trading) Lane

It sounds like a scene from “Jurassic World”: fast, agile predators pursue their slower, less nimble prey, as the latter flee for safer pastures. Yet this ecology framework turns out to be an apt analogy for today’s financial markets, in which ultra-fast traders vie for profits against less speedy counterparts.

Pound Pounded as BOE Action Portends Easing and UK PMI Comes in Weak

The British pound has been hammered to fresh lows just above $1.3115. The euro is moving toward GBP0.8500. The immediate catalyst is three-fold.

First, one of the UK’s largest property funds has moved to prevent retail liquidation. Second, the BOE reversed an earlier decision on the capital buffer for banks, which is tantamount to easing policy by boosting the banks’ lending capability by as much as GBP150 bln. Third, UK services PMI was weaker than expected.