Month: May 2016

Published Modern Trader Magazine, Futures Magazine May 29th, 2016. See site for Index Values and Interest Rate charts,

here charts

http://www.futuresmag.com/2016/05/29/new-negative-normal

As the 1980-era adoption of supply side economics was supplanted in favor of Keynesian stimulus following the 2008-09 crisis, interest rates in 10 nations experienced a negative rate of change of 24.94%, with the downward trajectory continuing to present day. Viewed from 2014-15, the negative rate of change was approximately 40% of the 2008-09 depreciation and -8.58% year-over-year. The year 2008 was a turning point. The policy choice dilemma was stimulus or adjust for the future.

As such, a regressive stimulus policy was chosen. With the end of Bretton Woods and the new era of free floating currencies in1971-72 as the starting point, there are four quadrants, each quadrant being 12.5 years. The year 2008 was the demarcation line of the third and fourth quadrants. Stimulus policy expedited markets into the final period.

Since 1694, when the Bank of England was established as the world’s first central bank–followed by Scotland in 1695–it has been customary for central banks to adopt questionable fourth-quadrant policies when a new market period highlighted by prosperity reigns.

Sir Isaac Newton began cycles and quadrants when, as Chancellor of the Exchequer, he overvalued gold in relation to silver in 1717. Subsequent 50-year market periods 1770-1820, 1820-1870, 1870-1920 and the current gold wars that began just prior to the 1971 closing of the gold window were based on gold’s fixed valuations.

The reason fourth-quadrant policies are generally questionable is because of traditional second-quadrant market crashes. New policy prescriptions are implemented in fourth quadrants because third-quadrant corrections end, following the fallout from the second-quadrant crashes.

Analyzing rates
A 10 supra-national simple interest rate index was constructed not only to analyze the current economic context, but to explore the interest rate situation, particularly as it relates to the five negative interest rate nations.

The 10-nation supra-national index includes Switzerland, Europe, Japan, Sweden, Norway, the United States, the United Kingdom, New Zealand, Australia and Canada. Interest rates include Saron (Switzerland), Eonia (Europe), OCR (New Zealand), OCR (Australia), call rates (Japan), Stibor (Sweden), NOWA (Norway), Fed Funds (United States), Sonia (United Kingdom) and Corra (Canada).

Negative interest rate nation Denmark was slated as the 11th cohort, but the Denmark central bank, in cooperation with the Danish Bankers Association, is in transition to transfer Tom/Next data responsibilities to Nasdaq OMX. Current data, rather than historical, is difficult to obtain. The negative interest rate supra-nationals Switzerland, Europe, Japan and Sweden were included.

Monthly data were aggregated from January 2007 through January 2015 for each index component and calculated as simple moving averages recorded in successive order from one to nine years for each nation, for a total of 90 moving averages. Data points total 1,080,108 monthly averages for each nation. As a simple index, the year 2007 was the base year for viewing 2008-2015. Overnight interest rates constitute the commonality among index component interest rates (see “Global meltdown,” below).

As many nations abandoned Libor fix participation, central banks began a long arduous process of reviewing national commonalities to revamp overnight rates. Traditional overnight rates were set low to balance both end-of-day bank surpluses and deficits, but also to gain a competitive advantage in other nations’ markets.

Overnight rates were used because of disjunctions between and among nations in specific markets. The United Kingdom and the United States, for example, lack a 60-day maturity relationship, while New Zealand and Australia are void in the one-year maturity connection. The most important consideration for revamping overnight rates was to re-establish corridor systems inside respective national markets, as well as between and among nations.

Interest rate corridors are reflections of monetary policy. The European Central Bank interest rate corridor from Eonia to the refinance rate was traditionally set at 75 basis points post 2008, and 100 basis points since the euro introduction. Because of four Eonia reductions from June 2014 to the present, the corridor is now 60 basis points.

Further current corridors are: United States, from Fed Funds to headline is 14 basis points, and from Eonia to Fed Funds is 77 basis points. Japan to Europe is measured at 30 basis points, and 47 basis points with respect to the Fed Funds rate. Australia and New Zealand share a 25-basis-point relationship, and 77 and 88 basis points with respect to the Fed Funds rate. Swiss to Europe allocates 30 basis points, 30 basis points to Sweden, 20 basis points to Canada and 1.07 to the Fed Funds. The United Kingdom to Europe corridor is 80 basis points and nine basis points to the Fed Funds.

Not only did interest rates peak in 2007, but corridor compression is the result of adoption of Silvio Gesell’s first time implementation of negative interest rate experiments.

Policy shift
Based on Gesell’s 1906 “Natural Economic Order” and his 1891 “Reformation of Coinage as a Bridge to the Social State,” central bank policy delineates three goals: Stop the rate of interest growth, control money velocity and stop exchange-rate appreciation.

Money velocity is key, especially as money is directed inside small corridors. If money supply velocity is measured as gross domestic product (GDP) divided by monies in circulation, then the object of money circulation is to channel money inside smaller corridors. Economically, velocity equalizes goods and money relationships to determine prices and stabilize purchasing power. Money is stagnated by rates of interest growth, and if removed GDP would rise quickly to the point negative interest would be justified. Gesell views interest rates in reverse order as prices drive interest rates rather than movement in money supplies.

A further policy to ensure money direction inside corridors is to eliminate interest rate maturities and then connect remainder interest rate categories to an interest rate fix based on volume. The ECB offered 15 maturities upon euro introduction and then eight in 2013. Five maturities will be offered July 1. The Federal Reserve has adopted volume-weighted medians. Consolidated maturities allow future interest rate rises and reductions to normalize expeditiously. The ECB, for example, normalizes many months post-rate rises or falls, while New Zealand and Australia normalize within days. The downside to consolidated maturities and volume fixes is less ability to control and slow volatility.

As 2008-09 experienced negative rates of change year-over-year, overnight rates continued a slower rate of change decline until 2014-15. The ECB was the first in June 2014 to slash the Eonia to zero and then entered negative territory on September 2014, followed by the Swiss in December 2014 and Sweden in 2015. Canada reduced Corra on January 2015, while New Zealand dropped OCR from 8.25% in January to its current 2.25%. While rates of change slowed from 2008 to 2014, actual year-over-year changes maintained a steady rate of decrease, as 2012-15 saw a -30.23% collectively, yet the full contraction began aggressively again in 2011.

The index mean of the 2007 base period was 1.7109, and it was consistent as measured against forward rates year-over-year, although seven-year rates calculated six years forward at 1.9762 lack synchronicity to the remaining yearly maturities. Correct forward curves are smooth to allow trades between rates. An out-of-sync maturity alters curve dynamics. Descending forward rate lines are a major hurdle to overcome if interest rates ever change course and rise. In volatile and uncertain interest rate markets, it becomes harder to pinpoint the correct trade able maturity to lock in forward rates for future dates. Hedges must adjust constantly.

Carry trade implications
The carry trade measured from the high-to-low mean index values and calculated in terms of foreign exchange pips reveals that 10,860 pips were lost since 2007 (see “10-Nation Simple Index,” below). There were 7,279 since 2008, while remaining under the current 11,679 mid-point. The index began in 2007 at 17,109 pips and ended January 2015 at 6,249. In actual yearly pips lost, 2015 experienced the sharpest decline at 1,080. In 44 years of currency trading since the January 1972 free float in monthly averages, 18 years had 1,000-pip or more losses years, and 10 years experienced 1,500 pips or more. Falling interest and exchange rates lend uncertainty to carry trades as a steady source of income, currency value appreciation and yield gain, and analyzing this data can provide some clarity to the process.

Aggregate weights were calculated year-over-year to confirm the division between the six- and seven-year maturities and also to confirm the downslope year-over-year. Aggregate weights rarely hold enormous trade able revelations; however, weights provide insights to positions and possible adjustments as the simple index is oversold, while aggregate weights lean toward overbought. This suggests that we’ll see at least a slower rate of change, as aggregate weights were calculated to be 1.2349 for 2015.

Among the five negative interest rate nations, the Swiss Saron is negative with respect to the seven-year average, while Eonia is negative with respect to the three-year average. The Stibor is negative at the one-year average, while Norway and Japan remain positive from one through nine years. Denmark’s Tom/Next rates, based on compiled data, are negative with respect to the four- to five-year average.

Negative trends
As quantitative easing met Keynesian liquidity traps when interest rates attained zero and the intended economic effects failed to materialize, negative interest adoption was the next step. This is a break of the positive zero point when ranges encompassed 0.0 to 1.0. While zero is the bottom, negative zero represents a catastrophic collapse for a simple reason: Money achieves a negative value. As ranges, Sweden and the ECB remain middle bound while Japan and Norway are at the top of the range. Denmark and Switzerland are located at bottom ranges.

The crisis and precipitous drop in 2008-09 offered downside trend momentum. Central banks not only adopted Gesell’s negative interest rate theories but followed Gesell explicitly in terms of exchange rate depreciation, slow interest rate growth and channeled money velocities. The current period represents the implementation of these policies. The question for the future is whether central banks will revert to supply side policies by manipulating the daily money supply once interest rates bottom and reverse course.

Of course, embedded in this question is the assumption that the current negative interest rate policy will prove successful. Negative interest rates are not only here to stay for the foreseeable future, but until inflation targets are achieved, more central banks are expected to adopt them to remain competitive. Norway, Bulgaria, Czech Republic and Israel are possible candidates.

About the Author
Brian Twomey is an independent trader and author of “Inside the Currency Market: Mechanics, Valuation and Strategies.”

Not only is a supposed June hike possible but the June raise timing if it materializes coincides to July 1 changes at the ECB. Current Fed/Eonia spreads run 0.72 bps while a possible Fed hike would raise spreads to 0.85 bps. The Fed nor the ECB will be able to contain this type of volatility no matter how much advance warning received. The most important aspect to the volatility story is the success or failure of the ECB’s new plans as the design is slated to stop volatility. The other aspect to a possible June raise is not only a severely overbought USD interest rate system but FED M1.

Current M1 weeklies run in billions 3224.00 and 3108.00 Feb 22nd. Monthlies run 3183 from April and 3105 February 2016. On a 5 year basis, 3183 rose dramatically from 1898. 10 year from April 06 rose from 1380 to current 3183. And from the 2008 crisis, 1405 to 3183 or 2.3 times the rise. To offer context, July 2001 M1 was 1131.

From 1960, current M1 is in a first and uncharted territory. Why M1 is because not only does M1 correlate to exchange rates but interest rates and money supplies share an adverse relationship. Between overbought short term interest rates and rising money supplies is not a proscription to raise by any economic standards. Not sure if even Keynes would approve.

EUR/USD Bottom drops 5 pips to 1.1054 from 1.1059. Overnight, EUR held. Overnight points were 1.1064 V 1.1059 bottom. Today, bottoms converge as 1.1059 and 1.1054. Tough area as a break would target next 1.1014 over coming days from previous 1.1019. Further downside targets, 1.1005, 1.0973, 1.0941.

EUR/USD targets 1.1054 Bottoms on breaks of 1.1083, 1.1168 then 1.1054 Bottom.

Upper targets 1.1136 and 1.1194. The levels at 1.1194 as mentioned last post contains again today massive hurdles at 1.1133, 1.1161, 1.1187, 1.1193 as well as 1.1194 and the 100 day at 1.12222. The point at 1.1222 is dropping but must break to target higher at 1.1273 and 1.1335. Again, sell rallies is the ongoing strategies as the range is 1.1059, 1.1054 to 1.1190’s.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/USD: Levels, Ranges, Targets

Despite oversold EUR/USD overall, massive hurdles exist to the upside beginning with 1.1196 and 1.1224 at the 100 day average. Both are the big break points this week to see EUR/USD higher to target the level at 1.1279, Range break at 1.1340 and 1.1376. But the price at 1.1198 faces a tough break point first at 1.1166.

The line at 1.1376 is the 3 month line and began last Sunday at 1.1487 and 1.1411 last Thursday. This line is descending quickly by the day on current prices and should hover during the week between 1.1350 ish to 1.1420 and provide solid resistance.

On the downside, EUR/USD faces a rough break point today at 1.1064. This line will not only hover by a few pips all week as the line is dynamic but a break will open the flood gates short to target 1.1019, 1.0978, 1.0946 and 1.0902.
Overall EUR/USD is contained between big breaks at 1.1064 – 1.1196 and 1.1224.

In the larger context, EUR/USD for the past few weeks has been fighting against overbought V oversold on its own price curve. Reason for this struggle is due to the long length of time to normalize after the last Draghi cut. This factor is inherent in EUR/USD and born inside its structural DNA.

Why we saw 1.1400’s was not only the gap in the curve but Yellen helped drive prices higher. EUR/USD rose inside overbought and a rare, rare day to see such a move but it also explains why the drop from 1.1400’s to current 1.1100’s. The curve is now fairly normalized and overbought throughout the curve as the gap is closing fast. What this means is a sell rally approach overall as EUR/USD is heading far lower over time.

The Bottom over the next day is found at 1.1059 and adds as a confluence of support to 1.1064. So 1.1059 and 1.1064. How price travels to 1.1059 is by breaks at 1.1087 and 1.1073.

Upper targets are 1.1141 and 1.1199. Despite the 1.1199 target, the points at 1.1196 and 1.1224 are falling from above. As long as price remains below, both lines will continue to fall by a few pips each trading day over the week. What 1.1141 means is a range point exists at 1.1166. So 1.1141 and 1.1166 again forms thick resistance and should povide a good sell and reverse opportunity.

First of the month is here this week which means time for monthly trades to post.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/USD: Levels, Ranges, Targets

Today’s EUR/USD price is well balanced. Overall, long and short term remain in struggles against each other. EUR/USD wants to fly higher but lacks ability. EUR/USD troubles begin at upper 1.1200’s and its why we see today’s upper range break at 1.1296. Price in upper ranges can’t hold. Only Yellen can force EUR higher but then EUR goes to upper strasosphere where it cannot remain for long. GDP is overold and should come higher. Fact is Oversold, come higher hasn’t been calculated.

EUR/USD Bottom 1.1136.
Range breaks above 1.1296, 1.1489, 1.1525.
Range breaks below 1.1090, 1.0903, 1.0869.
Upper targets 1.1273, 1.1244, 1.1216.
Lower targets. 1.1164, 1.1153, 1.1136 Bottom.

Most important breaks today, 1.1226 and 1.1198. Both must break to go higher. 1.1198 is the main signal line and its dropping.

Upper points 1.1353, 1.1296, 1.1275, 1.1215, 1.1200,
Lower points 1.1094, 1.1090, 1.1058, 1.1023, 1.0979.

Brian Twomey, Inside the Currency Market, btwomey.com

Two main drivers to AUD/USD are AUD/CAD and AUD/EUR. EUR/AUD lost its way this week at EUR/USD Corelation at 18% and negative 76% V AUD/USD. The best EUR/AUD offers is +76% as AUD/EUR to AUD/USD. EUR/AUD is naturally a wide ranging pair but its also contained by AUD/USD and AUD/CAD and AUD/CHF.

What contains AUD movements overall depends on the RBA triggers it offers to its currency pairs.
Traditionally, pure commodity prices drove AUD. But AUD wasn’t falling based on its commodity counterparts. Its why Glenn Stevens called for lower AUD prices over past statements but the lower AUD never materialized despite further falling in commoditiy prices.

At this point and in desperate need to export at lower AUD prices, Guy Debelle jumped on the redesign of the AUD interest rate system, a system ongoing. Why the sudden jump is not only to match the remainder of the world in its redesign but AUD Import and Export prices are out of sync as well as its Trade Ables to Non Trade Ables as the main measure to AUD CPI. I see the RBA OCR cut as one and done but done to force the exchange rate lower. The new system will take good care of the exchange rate as the RBA is a smart bank and matches its counterparts at the RBNZ.

What emerges is AUD as traditional pure capitalist markets as has been the case in AUD since its founding in the 1700’s. What should emerge economically is a more robust economic system as the exchange rate was figured in relation to AUD main economic drivers.

AUD/CAD connection to AUD/USD is based on its long, long standing tradition dating back to trading in Spanish Holy Dollars and other forms of currency exchange. Canada and Australia share the same calculations to its Total Return bonds to again carry the tradition to the modern day. AUD/CAD materialized as a natural driver in the modern day.

AUD/USD. Bottom. 0.7186. Range breaks above 0.7302, 0.7411, 0.7459. Note 0.7302 remains since last report.

Range breaks below 0.7144, 0.7039, 0.6994.

Upper targets 0.7264 and 0.7254 and reversals. Targets overall can change by as much as 20 pips as we head into American markets. Its highly doubtful because EUR/AUD has problems. Watch 0.7302 range point.

Lower targets 0.7204, 0.715 and 0.7186 Bottom.

AUD/CAD. Bottom 0.9353. Range break above 0.9523, 0.9598 0.9665, 0.9768. Main drivers 0.9598 and 0.9768.

Range breaks below 0.9317 and 0.9121.

Upper targets 0.9453 and 0.9441. Below targets 0.9376, 0.9364 and Bottom 0.9353.

AUD/EUR. Bottom 0.6463 = 1.5472 EUR/AUD.

Range breaks below 0.6534, 0.6631 = EUR/AUD 1.5304 and 1.5080.

Range breaks above 0.6392, 0.6298, 0.6258 = EUR/AUD 1.5644, 1.5878, 1.5979.

EUR/AUD Big Break 1.5649.

Lower Targets 0.6499 and 0.6491 = EUR/AUD 1.5386 and 1.5405.

Upper targets 0.6446, 0.6438, 0.6463 Bottom = EUR/AUD 1.5513, 1.5532, 1.5472.

Brian Twomey, Inside the Currency Market, btwomey.com

The best information to transmit in regards to USD/JPY is its massively oversold, short, long, intraday, historic and any other terms to view. But like CAD and other USD pairs, the upside contains hurdles.

Two points hold USD/JPY from upper targets at 113.72, those points are 111.39 and 111.51.

The bottom is contained at 109.25 and 108.76. Most vital is 108.76 because then the bottom drops to major base of supports beginning at 106.30, 105.85, 105.66, 104.47 and 103.02. Supports travel incrementally to 99.00’s.

May 1st, USD/JPY hit its bottoms at lower 105’s and skyrocketed 500 + pips to current 110’s. Buy dips looks like the way for USD/JPY.

Brian Twomey, Inside the Currency Market, btwomey.com

The BOC and Poloz goal is to see the FED raise and perform the lower CAD job for the BOC. That means USD/CAD higher. Current 2 and 3 year yield spreads are running 0.31 and 0.41. The 2 year is up 3 bps from 0.28 bps in overnight trade. Intraday, USD/CAD is oversold but oversold contains hurdles.

Viewed from longer term averages dating to 1998 to 2000, USD/CAD is vastly oversold. Viewed from averages from 2003 – 2007, USD/CAD has overbought problems and derived from the 2003 to 2006 boom in the last economic cycle. Overbought means USD/CAD begins to enter extrmes at 1.4100’s to 1.4200’s and 1.4400’s. Its not uncommon for a wide ranging pair such as CAD to violate those extremes as we’ve seen many times since 2008. But 1.4100’s begins warning to view shorts rather than build on longs. What’s driving USD/CAD is oversold from 2008 to current intraday period because USD/CAD built an enormous base of multiple supports from 1.1685 to 1.2289.

To travel higher, USD/CAD must break 1.3132 and 1.3192. Below rough supports begin at 1.3022 and 1.2966. Most important line is 1.2966 because then the 50 day average must view at 1.2859. Below 1.2966 and 1.2859 lies nothing until 1.2200’s, specifically 1.2289 and 1.2209. Look for Bottoms and a reload of longs at 1.2966 to 1.3022. Plenty of room to run for USD/CAD upsides with targets beginning at 1.3300’s if hurdles break at 1.3132 and 1.3192.

Brian Twomey, Inside the Currency Market, btwomey.com

Last evening AUD/USD Dead stopped 0.7218, 2 pips shy of reported second target at 0.7220, 8 pips above first target 0.7210 and broke 0.7203 range. At post time, AUD/USD was already not only at 0.7150 Bottom but 0.7140 was next range break. What happened with AUD at 0.7203 was range moved. Most important, Australia’s goods exported at a correct price.

CAD and BOC this morning, we’ll look at CAD further. Maybe USD/JPY as well. USD/JPY was completely covered May 1 as a monthly trade when long from 105 resulted in a + 600 pip trade for the month.

EUR/USD. While the focus in other EM and Asia pairs highlighted the disjunctions between EUR and USD, sometimes this binary view is not necessarily the full explanations nor cause of problems. EUR/USD within its own pricing curves has severe problems in its continuity. Short term, EUR/USD desperately wants to fly higher but lacks ability as other portions of the curve stop any price rises. As I look back over many days, this struggle has been a constant.

EUR/USD. What held yesterday morning and overnight was 1.1150 Bottom V the next range point at 1.1134.

Today’s vital points above, 1.1301, 1.1272, 1.1224, 1.1188, 1.1166, Then rough between 1.1150 to 1.1153.

Below Vitals 1.1058, 1.1045, 1.1019, then 1.0977, 1.0960,1.0935. Why vitals because ranges are wide from 1.1334, 1.1511, 1.1547 above to 1.0900’s below.

Bottom today 1.1090. Upper targets 1.1218, 1.1165, watch closely for reverse at 1.1191 as this point converges against 1.1188.

Where’s longs, at bottoms. The import of today’s bottoms is 1.1090 breaks, next comes 1.1058 and a long way down. Normal market conditions, they don’t allow prices to fly in wide variations so look at 1.1090 as vital today.

Brian Twomey, Inside the Currency Market, btwomey.com

Posted early this morning, Tuesday, May 24,

Since Thursday, EUR/USD ranged in the 1.1220, 1.1218 area and failed to break. Those points are the 100 day average at 1.1220 and equilibrium in the price distribution at 1.1218. The significance of 100 day averages in FX trading is corporates trade 100 day averages to not only hedge but lock in Forward rates. A spot price at 1.1220 and hovering at the 100 day represented problems which means 1.1220 had to move. Price moved and broke below to now trade 1.1170’s to 1.1180’s. And despite Y V Y GDP at 1.3 and 0.7 Q V Q.

A lower EUR/USD and higher GDP is first signs of the success of Gesell’s Negative Interest Rates, now in year two, four cuts to total 0.50 or 1/2 point. The main battle yet to be seen to signify a further victory is higher Inflation and currency price reactions to the release. While the word victory and two years later was written, remember Robert Burns in the Mouse states the best laid plans of mice and men often go astray. The ECB;s work in still ongoing.

The next ongoing step is July when the ECB implements wholesale changes to its interest rate methodologies as interest rate categories compress from 8 to 5. This event is a huge development in not only currency prices but overall markets in particular because the currency price is self contained and informs every market price and every financial instrument on the planet.

What brought EUR/USD to the brink at 1.1220 was the hope and dreams from the FED to raise Fed Funds in June. Why hope and dreams is because 13 pages of the statement revealed a sketchy, unsure, unprepared voting block as to a raise. But now FED speakers are out to clarify the message to remain front and center and in control of markets. This is the same crowd that brought Dot Plots based on 5 year Fed Fund averages. The 2008 crash entered a new era in central bank methodologies.

Fed Funds is not only miles overbought but its contained inside a 0.25 to 0.50 range. The close at 0.37 is mid point of the range but protected below by 0.25 at the Repurchase Agreement rate. The Repurchase Agreement rate is the deal able rate for the FED to reinvest maturities through open market operation so never could FED Funds drop below 0.25 nor ever trade above 0.50 unless a change occurred in headline.

EUR/USD. For today, Bottoms are located at 1.1157 and massive supports at 1.1134 and 1.1111. Above resistance points 1.1234, 1.1268 and 1.1291. Targets fall perfectly at 1.1230 and 1.1281, down from 1.1291 and 1.1248 yesterday.

The main short / long points overall are 1.1220 and now 1.1218. Further below targets 1.1092, 1.1044 and range break at 1.0977. The strategy is short, sell rallies as EUR/USD is heading far lower over time.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/JPY from current 122.51 sits perfectly on a vital support as next significant point below is found at 122.41. Both points represent 1636 and 1615 day averages. Next major point above 123.61 and 123.89. Overall range 122.51 to 123.61, 110 pip range. EUR/JPY continues to run 90% correlations to USD/JPY. A break of 122.41 offers next 121.86 and today’s Bottom.

EUR/CAD from current 1.4720 offers next significant break point at 1.4712 but thick supports exist below from 1.4672 to 1.4607. After 1.4672 comes 1.4658, 1.4631, 1.4610 then 1.4607. Above EUR/CAD faces rough resistance at 1.4809. Today’s Bottom is located at 1.4692.

Brian Twomey, Inside the Currency Market, btwomey.com

EUR/HUF as is usual for all EUR pairs V USD is EUR pairs trade above USD. No different in EUR/HUF V USD/HUF. The current EUR/HUF price at 315.92 has bottom today at 314.37.

The next big break points below are 313.93, 311.73, 310.27 and 310.11. The upside target is located at 316.41. The big 17 year base for EUR/HUF was built on 300.00, 302.09 and 306.32. Current price is mildly overbought and in sell rally mode.

USD/HUF. From current 282.71, USD/HUF sits oversold from massive supports points below at 280.22, 279.76, 277.87 and 261.48. That’s the shortest term view. Longer term, the 2002 averages at 217.32, 232.10 and 243.98 are overbought.

The Forint like all EM pairs are fighting USD oversold short term V overbought EUR. What is seen is the USD V EUR struggles inside Forint’s prices as USD interest rates rises must direct any chance for trend moves. Price moves are ranges and very short term.

Brian Twomey, Inside the Currency Market, btwomey.com

What drives NZD/USD is the revolving correlations to EUR/USD which in turn affect NZD/USD’s relationship to EUR/NZD. Its a common relationship because the only connection NZD/USD has to Amrican and European markets is through EUR/NZD. The same situation is found in AUD/USD to EUR/AUD. Currently NZD/USD is vastly oversold.

NZD/USD from current price at 0.6731, faces tough resistance above at 0.6764, 0.6771, 0.6829 and 0.6915. Below next comes 0.6717, 0.6691, and 0.6610. Nearest ranges are 0.6717 to 0.6764, 47 pip range. A break below at 0.6717, targets next 0.6691 yet inside a 26 pip range.

EUR/NZD Bottom for today is located at 1.6520. The ranges are wide from 1.6961 above to 1.6322 and 1.6254 below. The next significant break above is 1.6622. For the most part, EUR/NZD historically tracks the DXY well. A higher DXY sees a higher EUR/NZD. As ranges in EUR/NZD are always extremely wide, movements are terrific and move far and wide.

Brian Twomey, Inside the Currency Market, btwomey.com

The years old story to ZAR is it remains extremely overbought and includes EUR/ZAR as much as USD/ZAR. Overbought for USD/ZAR derives from its price skyrocket from 8.00, 9.00 and 10.00 since the 2008 crisis. EUR/ZAR likewise skyrocketed from 10.0 and 11.00 since the crisis and never looked back. Last time EUR/ZAR saw 10.56 was January 2012 and price bolted to 17.47 highs January 2016.

EUR/ZAR from current 17.48 reaches dangerous and sell point price extremes at 18.06, 18.25 and 19.45. Since EUR/ZAR rose from 10.00 and 11.00 lows, it built support points along the way and those support levels made EUR/ZAR’s desperately needed fall much more difficult. So it remained in upper extreme overbought over longer periods. EUR/ZAR traditionally is a great moving pair but dangerously overbought. Like EUR/HUF, EUR/NZD trades above its USD counterpart in USD/ZAR.

Why both EUR/ZAR and USD/ZAR are at overbought extremes together is because both Correlate solidly at 91%, both prices varied just over 2% and both ironically are fast approching bottoms. EUR/ZAR viewed from USD/ZAR should trade between 17.29 to 17.11 from current 17.48.

From 17.11 is vital as two supports exists at 17.12 and 17.10 then 16.92. Outside 16.92 below is out of bounds and out of bounds from 17.29 above. The import of 16.92 is the bottom drops out as next support is located at 15.13, 14.76, 14.26 and 13.43. Intraday, EUR/ZAR is oversold, USD/ZAR overbought yet not to any alarming degree.

USD/ZAR from current 15.63 is held by supports below at 15.27, 15.25. Next below comes 15.11. USD/ZAR should trade V EUR/ZAR between 15.40 to 15.26. Current price at 15.63 is 23 pips out of bounds. The point at 15.11 is bottom and out of range if price trades below. The import of 15.11 is next major support exists at 13.66 then 12.47 and 11.67.

Brian Twomey, Inside the Currency Market, btwomey.com

ANALYSIS | 37 minutes ago
EUR/SGD and USD/SGD: Trade Ideas

EUR/SGD from current price at 1.5384 is not only fast approaching bottoms but massive price pressures are building inside current prices. The next big support below lies at 1.5308 but don’t expect price to reach 1.5308 nor hold should a market fluke take price to those lower levels. Why EUR/SGD price pressures is due to Correlations to EUR/USD at 32% and 0.02% V USD/SGD which is correct.

To relieve price pressures, EUR/SGD must travel higher. Problem is at current 1.5384, vital breaks just occurred at 1.5412 and 1.5442. Viewed from USD/SGD, current price must trade inside at least 1.5387 to range between 1.5387 to 1.5448. Above 1.5448 then ranges and upper target becomes 1.5509 t0 1.5448. Watch 1.5412 on the way up. EUR/SGD is in a tough situation as price below 1.5387 is out of bounds and 1.5509 is also out of bounds so range is 1.5387 to 1.5509 with breaks at 1.5412 and 1.5448.

USD/SGD is oversold both long, short terms and intraday. From current price at 1.3812, next vital supports below are located at 1.3780, 1.3740, 1.3709 and 1.3638.

Big floor and range bottoms exist at 1.3638 and 1.3633. What both points means is breaks open downside flood gates to 1.3484. Points above lie at 1.3970 and 1.3989 and further out 1.4208.

USD/SGD should trade between 1.3633 to 1.3927 with breaks in between at 1.3780. At 1.3812, ranges become 1.3780 to 1.3927.

Common theme running through ZAR, SGD, HUF is the USD V EUR relationship is causing problems inside the home nation currency pairs. For USD/SGD, price is oversold but EUR/SGD can’t handle downside price moves. USD or EUR must move to align the home nation currency pairs.

Why SGD is vital to the world is not only is it a vital money center location for Asia but many nations such as Japan list securities on SGD exchanges. The other part of the conundrum is markets severely lack volatility.

A misaligned currency pair in price and correlations once aligned in lightening speed. Today, misalignments remain to the point when price is ready for explosion such as EUR/SGD. EUR/SGD is not just ready and must move but its ready to explode from its present location. If blame was placed inside the EUR V USD problem then DXY for the past two months ranged between 93 to 95 with hope and promise of a Fed rise.

Brian Twomey, Inside the Currency Market, btwomey.com

Expanded Version, Submitted FX Trader Magazine, July Publication.

Commercial Paper, T Bills and Eurodeposit Rates

Commercial Paper was introduced as a variable interest rate employed as a means to rebuild America after the Civil War in the 1860’s. Due to its variable interest, Commercial Paper was the trade able interest rate 50 years prior to Federal Reserve introduction, 55 years prior to Fed Funds introduction, 65 years prior to T Bill introduction, 57 years prior to FED Open Market Operations, 30 years prior to Dow Jones Index introduction, many years prior to individual stock introduction and long before consideration was given to nation to nation interest rates.

Commercial Paper interest would later assist to build yield curve maturities and cross border deposit rates such as Libor, Euro, money market and other deposit rates such as Certificate of Deposits. Commercial Paper assisted in later introduction of General Collateral interest rates as a conduit to borrow against securities. Commercial Paper is the foundational interest rate especially in a primitive banking system of the 1860’s and beyond.

From the 1860’s, Commercial Paper funded Freight and Railroad shipments, Freight and Railroad Insurance, passenger services, research, inventions, travel . The list to fund successful growth under pure capitalism is endless. What drove Commercial Paper rates was the Agricultural plant and harvest cycles. As corporations formed and grew from 14th amendment Supreme Court recognition as persons, Commercial Paper funded Receivables, Inventories, bank operations, Finance companies, Loans, broker dealer operations, money market and mutual funds. Again the list is endless.

As Commercial Paper, corporations and other markets developed, Commercial Paper was split into two main sections and hold as traded markets today: Financials and Non Financials. Most important inside the US is Non Financials while most important for corporations and offshore locations is Financials. Non Financials is clearly the driver as more issuers exist historically, more participants, larger market, greater finance needs and the market is US centered.

Calomiris, Himmelberg and Wachtel in a 1995 paper titled Commercial Paper, Corporate Finance and the Business Cycle: A Microeconomic Perspective report Commercial Paper Financial and Non Financial issuance quadrupled from 534 in 1973 to 1905 in 1994. By end 1991, holders with a 5% share accounted for Mutual Funds 33.9%, Households, Trusts and Non Profits 29.3%, All Retirement Plans 10.2% and 9.4% in Non Farm Corporate.

To offer what the vital import of Commercial Paper means to markets and traders today, Kacperczyk and Schnabl provide solid statistics as they viewed Commercial Paper in terms of the crisis in a 2009 NBER paper, ” When Safe Proved Risky”.
In 1990, the size of Commercial Paper markets were USD 558 billion and grew to 5 trillion by 2007 with 1.97 trillion outstanding. Financials V Non Financials accounted for 40.1% of the market while asset backed Commercial Paper accounted for 56.8%. The corollary was the $ 940 billion T Bill market. Not much changed today as the CP main, most important, most vital Finance Rate. Consider Friday Fed Funds volume was USD 61 billion, dead closed as usual at 0.37 and a tiny fraction of the Commercial Paper market. Consider the impending 2008 crisis was first seen long before in the Commercial Paper market. Ben Bernanke in a 1990 NBER paper and others over many years highlighted Commercial Paper as a leading indicator.

Like T Bills, Commercial Paper is issued at a discount, redeemed at face value yet exempt from SEC registration. The difference is T Bills are secured by US backing while Commercial Paper debt is unsecured. Long maturities are maximum 270 days yet average durations are 30 day deals with Rollover ability. Consider a 30 day deal at 100,000 face value purchased at 85,000 offers Bond Equivalent yields annualized at 214%, 107 % semi annual and 53% quarterly. Interest is not exempt like T Bills and its why Commercial Paper both Financials and Non Financials trade between T Bills and Libor. Current Commercial Paper rates trades between T Bills and Eurodeposit rates and informs correct positioning under healthy markets.

To define healthy markets, Commercial Paper trades in between Eurodeposit and T Bill rates as a protection to markets, ongoing investments, investors and issuers. If banks and markets implode and bank lending and borrowing fails then Commercial Paper markets allow business continuation at a historically higher yet fairly reasonable Finance rate. A deviation of positions warns of trouble ahead because of the unsecured V secured aspects to assigning interest and because of the historic negative correlation from bank lending to higher Commercial Paper rates.

While the focus remains on Fed Funds as insight into Fed hold or raise, Fed Funds and Libor rates rarely move. What is known regarding FED Funds from a recently posted article is Fed Funds rates are overbought to 10 year monthly averages and bumping against 95% bands on a vast majority of the 10 year averages. Eurodeposit rates as a proxy to Libor remain in the same unmovable and overbought condition as Fed Funds.

Fed funds at 0.37 is dead center of the new Fed target range since the first raise from 0.25 – 0.50. Fed Funds is held above 0.25 purposefully by General Collateral /Repurchase Agreement rates at 0.25. The rate at 0.25 is the deal able rate for Fed rollovers of securities through the System Open Market Account and a created tool to support Fed Funds in classic Keynesian traditions.

From Keynes, the Fed inserted an extra interest rate to allow the full control over Fed Funds while maintaining high balance sheets with rollover ability. Speculative markets and volatility was replaced by focus on Finance and a forced direction of monies. From the Fed’s traditional role 1914 — 2008 to add or subtract daily funds to maintain markets as a service to participants, the Fed post 2008 created markets, directed prices and even controls volatility.

Volatility hasn’t been seen in markets since pre 2008 and complaints from central banks in minutes and statements regarding volatility is a conditioning effect to inform as to trade in future markets. The word accommodative will remain a mainstay long into the future. Under 0.25, the traditional increase stimulus, lower interest rate conundrum was broke to now control both.
To understand unmovable Libor is to know Commercial Paper Financials is the location for US subsidiaries offshore to borrow, lend and fund current business. In current 1 month terms, Commercial Paper Financial rates are 0.43 V Eurodeposit rates at 0.48. Not bad for GE, Toyota, GM, automobile and manufacturing companies and others offshore in need to Finance operations. Any subsidiary company with US operations, any foreign company with US operations conducts business in Commercial Paper Financials. To understand the proper health of Fed Funds, Financing abilities and rates is to view Finance Rates in Commercial Paper.

Commercial Paper Financials and Nonfinancials, T Bills and Eurodeposit rates were viewed in successive 1 month averages 1 to 8 years out to 2008 or 96 months. The commonalities are 1 year averages drive prices in every financial instrument. Every financial instrument should trade at maximums 15 to 23 basis points lower. Averages 2 – 7 years in every financial instrument are massively overbought to the 99% and beyond bands. All averages are beyond maximum peaks but rather at massive significant points. Eight year averages support current prices except Eurodeposit rates at 0.53 against current 0.48. Commercial Paper 1 month Financials are most overbought followed by T Bills, Commercial Paper Non Financials then Eurodeposits.

Commercial Paper 1 month Non Financial averages varied from 1.3% lows to 1.8% highs while 1 month Financials varied 1.2% to 1.7%. T Bills varied from 1.02% to 1.2% while Eurodeposits varied from 2.1% to 3.10%. T Bills in terms of averages are farily lifeless as the variation fails to explain its high signal except in the 8 year average where its revealed 0.147 is fast approaching bottoms. What variation reveals is inside current prices in all financial instruments is pure noise, unexplainable, a meaningless price, a lost meandering ship.

Commercial Paper Financial and Non as well as Eurodeposits can all handle the overbought correction however all three are the rates to watch closely as insights to Fed Funds because prices are near bottoms. One aspect to the Peak problem is explained by eight years of averages without movements and Fed control.

Targets in Commercial Paper 1 Month Non Financials are located from 0.18 to 0.23 from current 0.33. Current price is supported by the eight year average at 0.25 and one year at 0.19. Commercial Paper Financial targets are located from 0.20 to 0.36 from current 0.43. Current price is supported by the 8 year average at 0.29 and 1 year average at 0.22.

T Bills from current 0.25 targets 0.11 to 0.20. Current price is supported at the 8 year average at 0.147 and 1 year at 0.10. Eurodeposits from current 0.48 finds resistance in the 8 year average at 0.53 and targets are located at 0.32 to 0.43. Price is supported at the 1 year average at 0.30 followed by the 7 year average at 0.28 then 6 year at 0.26 and 5 year at 0.25. Eurodeposits at 0.48 is not only bumping against 0.53 at the 8 year average but also bumps against the Fed headline at 0.50. Doesn’t seem likely Eurodeposits can trade higher than headline at 0.50 without a further rate hike from Yellen as correct Eurodeposit position is below headline.

The basis of this story is shortest term interest rates including Fed Funds are miles overbought and in dire need of corrections. Corrections may mean bottoms are here. Commercial Paper interest rates are deep insights to Fed Funds rather than Fed Funds itself as exclusive focus due to unmovability.

Commercial Paper rates actually see movements because its a far larger, liquid and safe market made of much more sophisticated dealers and investors. Normal deals begin at $100,000 and $250,000. Is overbought worth thr risk to commit further cash and to a lost price. Can Yellen raise under overbought interest rates, must a correction come first, will prices correct by the June and upcoming Fed meetings.

Typically central banks move when interest rates reach oversold or overbought but hardly move when a price is range bound. Timing is irrelevant as to an election but most important to the monthly meetings is budget cycles. They all watch prices daily. Interest rate movement is a wholesale change and central banks don’t like change. It explains why central banks are slow to move on interest rate changes and why they wait to overbought or oversold, always reactionary and never forward in responses. I’m still not convinced Yellen is ready to move Fed Funds higher unless bottoms and oversold are seen.

To further understand the growth of markets in relation to Financial and Non Financial Commercial Paper in the modern day, 1934 began the first ever views and accountability of Treasury International Capital or better known as TIC data to answer questions such as dollar amounts of securities foreigners are buying and selling and dollar amounts Americans are buying and selling in foreign securities. The process was a long affair to implementation.

In the 1970’s, data was reported every five years but Treasury as the first and dominant institution before Federal Reserve creation, assumed control of TIC data from the now defunct Office of Federal Statistical Policy and Standards. Treasury determined in the 1980’s the Fed should be provided with TIC data and this period began quarterly reviews of TIC to expand in the year 2000’s to monthlies and now annual and historic.

The investment idea was capital leaving X nation informs prices fall and become cheap so capital flows back into X nation to purchase lower priced financial instruments. When prices rise, capital leaves again so this system of capital flows provided a world balance to capital flows.

What is understood is long and short term purchases and sales in Treasury Bonds, Agency Bonds, Corporate Bonds and Stocks. More importantly is money flows are understood, quantifiable as well as overall specific buys and sells from individual nations. China and Japan for many years remain the largest holders of US securities with China easily number one as holdings in billions from February 2016 amount to 1252.3 V 1133.1 for Japan. Carribbean Banking Centers as third account for 261.1 and a new category of Oil Exporters amount to 281.0 billion. The UK lost its traditional position as third and fell to current 7th.

Companies such as Lipper, Morningstar and EPFR Global provide fund flows and asset allocation data in daily, weekly and monthly periods. Data is offered by sector, by nation, by financial instrument, by funds and equipped with extraordinarily detailed charts and commentary. Most important to interest rates and Commercial Paper in particular is Mutual Funds and Money market money flows as $24 trillion or so investment monies traverse the world in search of yield, gains and finance abilities.

What assisted Commercial Paper markets and interest rates in particular was the 1980 passage of the Depository Institution Deregulation and Monetary Control Act to reveal no restrictions on interest rates an institution could offer on deposits. The act deregulated interest rates and opened the free float in interest rates. As a sidebar, every decade either by reforms or crashes ushers in new market arrangements to last a full decade on average. Post 2008 is focused on control.

Insights to Commercial Paper and Fed Funds are found in Fed Surveys to Market Participants and Primary Dealers as to views on Fed Funds rises or falls. Primary Dealers are opinions of the highest quality and smartest assessments. Secondly, Commercial Paper Financial and Non Financial maturities are located at 1, 2 and 3 month durations while Eurodeposit rate maturities are found in 1, 3 and 6 months. What’s important regarding Commercial Paper in the 1 month maturity is correspondence to 1 month T Bills. Both rates offer solid bottoms to protect markets from crashes. The 2 month rate lacks a corresponding Treasury Yield and is a vital rate not only to US markets but the UK because the UK is deficient in the 2 month maturity.

Commercial Paper interest rates span a 156 year tradition in the US under continuous daily trade except for a few years in the 1930’s depression. Commercial Paper interest is the most important interest rate the world over because it informs not only healthy markets but Fed Funds rises and falls, capital flows and prices in currencies as well as other financial instruments.

Brian Twomey, Inside the Currency Market, btwomey.com

By Brian Twomey Modern Trader Magazine, Part 2 EUR/JPY Paper, Charts missing

April 28, 2016 • Reprints

Carry trades are a method to borrow at a low interest rate and lend at a higher one. The trade is played out through the currency markets. However, currency relationships are not necessarily stable, and it’s important to analyze how a particular cross rate behaves over time.

Last month, we began a demonstration of this analysis for some popular cross rates using regression analysis to investigate how the EUR/JPY switches allegiance between the EUR/USD, USD/JPY in terms of a carry trade, particularly surrounding the 2008 financial crisis. This month we take a closer look at how the carry trade itself has evolved over time and examine how economic drivers have affected the cross-pair carry trade balance.

Anatomy of a carry trade
Carry trades are based on forex points per day, per month or per year. They answer the question of how many pips are earned to carry positions. The indispensable aspect is the trader should earn more points than are paid to be compensated enough to offset price depreciation in the long currency pair position.

The complexity of carry trades changed in 1994 when closing spot prices were marked to market; therefore, gains and losses were marked daily. Previously, forex points ran throughout the life of the contract term as traders earned the difference cumulatively without showing daily mark-to-market losses, allowing carry trade positions to be held to maturity. Losses, risk/reward and crash risk all depend on earning enough of a cushion in points to protect against adverse price developments.

Forex points are calculated from the closing spot price multiplied by the interest differential, divided by the day count, multiplied by the number of spot lots or futures contracts.

Findings suggest that carry trades contain two distinct revenue streams. One is interest differential income and the other price appreciation. Both are based on the theory of expectation. The sine qua non is to define interest differential in terms of nominal vs. real interest rates through time or in longer 20- to 50-year terms.

Price appreciation/depreciation is then defined in terms of carry trade holding periods and the length of time in trades. Essentially, a forex point is the interest differential, and is employed as a predictor of future spot prices, but it is also defined as the cost to carry positions and formally referred to as the forward discount. Currency risk is not necessarily on the investment side of the long position, but on the cost or borrow side, which may not continue to finance the long position sufficiently.

The EUR/JPY experienced temporary price and permanent interest rate depreciation pre- and post-2008. The beginning of 2000 saw EUR/JPY paying 5.75% vs. 0.50% pre-2008 vs. 0.25% and 0.1% post-2008. Carry trade losses and gains in forex points are based on the length of time in a position. Possible losses were experienced from reduced disbursements post-2008. Current price trades in excess of returns pre- and post-2008; 131.39
pre-2008 and 121.30 post-2008.

Carry trade and EUR/JPY
The EUR/JPY is a currency pair whose position is found within the boundaries of the EUR/USD and USD/JPY. Because EUR/JPY is derived from EUR/USD and USD/JPY by U.S. dollar subtraction, boundaries must hold residual constants or the EUR/JPY transforms into a free-floating financial instrument without a connection to EUR/USD or USD/JPY.

While residual constants hold firm, the EUR/JPY may change allegiance year to year, period to period or possibly crash to crash. An allegiance switch implies that the EUR/JPY boundaries range from small to wide within EUR/USD or USD/JPY residual variances.

The assumption that the EUR/JPY maintains a perfect 0.5 balance between the EUR/USD and USD/JPY was not found; however, that does not imply a 0.5 balance is not possible. Perfect balance further implies the EUR/JPY lacks allegiance and is solely independent of EUR/USD or USD/JPY.

An explanation of perfect balance is that the EUR/USD and USD/JPY ranges varied widely enough against each other and reached polar opposite extremes. Because EUR/USD and USD/JPY are completely opposite pairs whose relationship barely hold a statistical relationship, EUR/JPY is allowed to roam freely between both pairs. Findings suggest, however, that EUR/JPY is influenced by either the EUR/USD or the USD/JPY, but not both. So a 0.5 balance may be fleeting.

The EUR/JPY carry trade is then defined further to include either EUR/USD or USD/JPY. To view EUR/JPY exclusively in carry trade terms ignores the comprehensiveness contained within carry trades.

Money supply
A fundamental economic theory that caused EUR/JPY to change its status from pre- to post-2008 can be viewed in money supply terms, rather than as a wholesale EUR/JPY positional shift. Housing was the cause; the effect was central banks adopting quantitative easing stimulus.

As we know, interest rates share an adverse relationship to money supply. Interest rates since 2008 continuously dropped for all nations as more money was issued. Nations then experienced a Keynesian liquidity trap dilemma with countries dropping the interest rate to either zero or near zero. Low interest rates create a small price movement environment for EUR/JPY because of shrinkage of the interest differential.

Quantitative easing led to a wholesale economic change adopted by many nations as “stimulus spending,” a significant shift from previous 1980s-era supply side practices. Keynesian economics is a focus on the demand side of an economy, while its corollary focuses on supply. Both define EUR/JPY as an economic insight, a price, a carry trade and currency pair alignment.

Cross rate shift
The EUR/JPY as a carry trade is defined based on its attachment to either EUR/USD or USD/JPY, but not both. As we saw here, the EUR/JPY cross rates attachment to the EUR/USD vs. USD/JPY fluctuated throughout the 15-year period post- and pre-2008. This is evident on both weekly and monthly data (see “Crisis diversion,” below).

We examined the carry trade in the EUR/JPY by using 5,532 exchange rates, weekly and monthly, for the entire period. We saw that the perfect EUR/JPY 0.5 balance between the EUR/USD and USD/JPY was not seen over a consistent, measurable time frame, although it may have been in place during fleeting instances.

One fundamental reason why the EUR/JPY changed loyalty from the EUR/USD to the USD/JPY was a result of governmental adoption of quantitative easing (see “Switching horses,” below). If EUR/JPY had a chance to reestablish its EUR/USD attachment, the drop in interest rates and Keynes liquidity trap for all nations appeared to fail under that occurrence. By examining 12 separate data samples —much of which was shown last month as weekly data—we examined EUR/JPY loyalties and allegiance switches in a step by step approach.

Covariance was the preeminent statistic that we used to understand how and to what extent EUR/JPY transferred its loyalty from EUR/USD to USD/JPY. Slopes and regression lines served as the pictorial result to demonstrate how price traveled. The most pronounced regression lines were seen in USD/JPY, because of a complete line reversal.

While this study was limited to the relationships among three popular cross rates, the analysis should not end there. Traders in all cross rates and currencies would do well to understand the depth and consistency of the relationships between the markets they trade. Further analysis is warranted to explore how shifts in these relationships might portend price changes that may offer further opportunity to exploit market inefficiencies.

About the Author
Brian Twomey is an independent trader and author of “Inside the Currency Market: Mechanics, Valuation and Strategies.”

Commercial Paper, T Bills and Eurodeposit Rates

Commercial Paper was introduced as a variable interest rate employed as a means to rebuild America after the Civil War in the 1860’s. Due to its variable interest, Commercial Paper was the trade able interest rate 50 years prior to Federal Reserve introduction, 55 years prior to Fed Funds introduction, 65 years prior to T Bill introduction, 57 years prior to FED Open Market Operations, 30 years prior to Dow Jones Index introduction and long before consideration was given to nation to nation interest rates. Commercial Paper interest would later assist to build yield curve maturities and cross border deposit rates such as Libor, Euro, money market and other deposit rates such as Certificate of Deposits. Commercial Paper assisted in later introduction of General Collateral interest rates.

From the 1860’s, Commercial Paper funded Freight shipments, Freight Insurance, passenger services, research, inventions, travel . The list to fund successful growth under pure capitalism is endless. As corporations formed and grew from 14th amendment Supreme Court recognition as persons, Commercial Paper funded Receivables, Inventories, bank operations, Finance companies, Loans, broker dealer operations, money market and mutual funds. Again the list is endless. As Commercial Paper, corporations and other markets developed, Commercial Paper was split into two main sections and hold as traded markets today: Financials and Non Financials. Most important inside the US is Non Financials while most important for corporations and offshore locations is Financials.

To offer what the vital import of Commercial Paper means to markets and traders, Kacperczyk and Schnabl provide solid statistics as they viewed Commercial Paper in terms of the crisis in a NBER paper, ” When Safe Proved Risky”.
In 1990, the size of Commercial Paper markets were USD 558 billion and grew to 5 trillion by 2007 with 1.97 trillion outstanding. Financials V Non Financials accounted for 40.1% of the market while asset backed Commercial Paper accounted for 56.8%. The corollary was the $ 940 billion T Bill market. Not much changed today as the CP main, most important, most vital Finance Rate. Consider Friday Fed Funds volume was USD 61 billion, dead closed as usual at 0.37 and a tiny fraction of the Commercial Paper market. Consider the impending 2008 crisis was first seen long before in the Commercial Paper market.

Like T Bills, Commercial Paper is issued at a discount, redeemed at face value yet exempt from SEC registration. Long maturities are maximum 270 days yet average durations are 30 day deals. Consider a 30 day deal at 100,000 face value purchased at 85,000 offers Bond Equivalent yields annualized at 214%, 107 % semi annual and 53% quarterly. Interest is not exempt like T Bills and its why Commercial Paper both Financials and Non Financials trade between T Bills and Libor. Current Commercial Paper rates trades between T Bills and Eurodeposit rates and informs correct positioning.

While the focus remains on Fed Funds as insight into Fed hold or raise, Fed Funds and Libor rates rarely move. What is known regarding FED Funds from a recently posted article is Fed Funds rates are overbought to 10 year monthly averages and bumping against 95% bands on a vast majority of the 10 year averages. Eurodeposit rates as a proxy to Libor remain in the same unmovable and overbought condition as Fed Funds.

To understand unmovable Libor is to know Commercial Paper Financials is the location for US subsidiaries offshore to borrow, lend and fund current business. In current 1 month terms, Commercial Paper Financial rates are 0.43 V Eurodeposit rates at 0.48. Not bad for GE, Toyota, GM, automobile and manufacturing companies and others offshore in need to Finance operations. To understand the proper health of Fed Funds, Financing abilities, rates and DXY as an extra added feature is to view Finance Rates in Commercal Paper.

Commercial Paper Financials and Nonfinancials, T Bills and Eurodeposit rates were viewed in successive 1 month averages 1 to 8 years out to 2008 or 96 months. The commonalities are 1 year averages drive prices in every financial instrument. Every financial instrument should trade at maximums 15 to 23 basis points lower. Averages 2 – 7 years in every financial instrument are massively overbought to the 99% and beyond bands. All averages are beyond maximum peaks but rather at massive significant points. Eight year averages support current prices except Eurodeposit rates at 0.53 against current 0.48. Commercial Paper 1 month Financials are most overbought followed by T Bills, Commercial Paper Non Financials then Eurodeposits.

Commercial Paper 1 month Non Financial averages varied from 1.3% lows to 1.8% highs while 1 month Financials varied 1.2% to 1.7%. T Bills varied from 1.02% to 1.2% while Eurodeposits varied from 2.1% to 3.10%. T Bills in terms of averages are farily lifeless as the variation fails to explain its high signal except in the 8 year average where its revealed 0.147 is fast approaching bottoms. What variation reveals is inside current prices in all financial instruments is pure noise, unexplainable, a meaningless price, a lost meandering ship.

Commercial Paper Financial and Non as well as Eurodeposits can all handle the overbought correction however all 3 are the rates to watch closely as insights to Fed Funds because prices are near bottoms. One aspect to the Peak problem is explained by 8 years of averages without movements.

Targets in Commercial Paper 1 Month Non Financials are located from 0.18 to 0.23 from current 0.33. Current price is supported by the 8 year average at 0.25 and 1 year at 0.19. Commercial Paper Financial targets are located from 0.20 to 0.36 from current 0.43. Current price is supported by the 8 year average at 0.29 and 1 year average at 0.22.

T Bills from current 0.25 targets 0.11 to 0.20. Current price is supported at the 8 year average at 0.147 and 1 year at 0.10. Eurodeposits from current 0.48 finds resistance in the 8 year average at 0.53 and targets are located at 0.32 to 0.43. Price is supported at the 1 year average at 0.30 followed by the 7 year average at 0.28 then 6 year at 0.26 and 5 year at 0.25. Eurodeposits at 0.48 is not only bumping against 0.53 at the 8 year average but also bumps against the Fed headline at 0.50. Doesn’t seem likely Eurodeposits can trade higher than headline at 0.50 without a further rate hike from Yellen.

The basis of this story is shortest term interest rates including Fed Funds are miles overbought and in dire need of corrections. Corrections may mean bottoms are here. Commercial Paper interest rates are guides to Fed Funds rather than Fed Funds itself as exclusive focus. Commercial Paper rates actually see movements because its a far larger market made of much more sophisticated dealers and investors. Normal deals begin at $100,000 and $250,000. Is overbought worth thr risk to commit further cash and to a lost price. Can Yellen raise under overbought interest rates, must a correction come first, will prices correct by June.

Typically central banks move when interest rates reach oversold or overbought but hardly move when a price is range bound. They all watch prices daily. Interest rate movement is a wholesale change and central banks don’t like change. I’m still not convinced Yellen is ready to move Fed Funds higher unless bottoms and oversold are seen.

Brian Twomey, Inside the Currency Market, btwomey.com

The price the price, that’s all you and me care about. Its only aspect that matters. Attack a price directly, directly, directly. Nobody knows how to do this simple concept. All attack sideways, that’s wrong. A price can only achieve certain levels, locations, ranges. Fibonacci is oh so deceptive and wrong because its measured wrong. Fair warning to stay away. Simplest and most accurate math formulas easily surpass crazy latitudes of Fibonacci. What’s Fobonacci, square root 5. Interesting but faulty.

Have I ever mentioned news announcements in many trade posts. Of course not. Why. Its meaningless pablum information. News announcements are priced into the current price. That means all factors are considered inside the price. Yes pay attention to news announcements but you don’t have to be an economist because that’s another discipline that;’s meaningless to your trading success especially if you day trade or multi day trades.
quick EUR/USD.

EUR/USD. Bottom. 1.1351, up 21 pips from 1.1330. Target 1.1458, Failure point 1.1422. Failed actual 1.1445. This was early morning today Wednesday May 11th.

Today actual EUR/USD afternoon. Hey did you know markets are split in two, yes morning and afternoon. Two markets meld into 1 by two different prices. Good example is japan, up in the morning, down in the afternoon. US up in the morning, down in the afternoon. This was man made invention and natural order of markets and created from the oldest traded instrument in the world, currency prices. Yes currency price drives world market prices in all Financial instruments..

EUR/USD Bottom 1.1375, Range break above 1.1710, 1.1893, 1.1945. Below range breaks 1.1155, 1.0984, 1.0933.

Target 1.1491, Failure 1.1450. Points on the way up, 1.1441, 1.1450, 1.1456, 1.1471, 1.1481, 1.1491.

Shorts below 1.1428, Target 1.1401, 1.1388, 1.1375 Bottom. 1.1388 mus hold and or cross above to head long.

The price the price, that’s all you and me care about. Its only aspect that matters. Attack a price directly, directly, directly. Nobody knows how to do this simple concept. All attack sideways, that’s wrong. A price can only achieve certain levels, locations, ranges. Fibonacci is oh so deceptive and wrong because its measured wrong. Fair warning to stay away.

Have I ever mentioned news announcements in many trade posts. Of course not. Why. Its meaningless pablum information. News announcements are priced into the current price. That means all factors are considered inside the price. Yes pay attention to news announcements but you don’t have to be an economist because that’s another discipline that;’s meaningless to your trading success especially if you day trade or multi day trades. What I see from posts from others I can’t read because the price is not understood. And its so obvious. I’m no genius and I speak with much respect and sincerity.

Any I gotta run, quick EUR/USD.

EUR/USD. Bottom. 1.1351, up 21 pips from 1.1330. Range breaks gotta go, back later

Posts on investing.com have ability to see views as the tally records based on every reader. I continually see my posts hit 300 – 500 views, sometimes more but it depends on the topics. If I write about the larger currency market or market picture, views literally skyrocket past 500 to near 1000. Its really astounding to see as I don’t know who these people are that read my stuff. Most posts I see 200- 300 within hours, other times 400 – 500 within 24 hours.

If ever investing.com places an article on front page, then my views go much higher. I made it on front page twice and never hold out hope because I’m not a named guy nor a regular writer. I don’t post often, I come and go in spurts because I’m incredibly bored and tired of these posts and to compete inside the clutter of garbage written by most. But write informed analytical words, show a brain cell is active then writings post very quickly. Insert an everyday or non eye catching headline attached to a good written article, investing.com will even assist with a good headline. My undergraduate degrees are in Political science and journalism. I vividly remember I despised Dr. Smith’s class on headline writing. I liked Dr Smith in every regard but not headline writing class.

Anybody can write for investing.com. Pretty much just sign in and write. But they want general words yet analytical and not complicated topics or an article will reject. Don’t offer trade recommendations, targets, don’t advertise yourself, yell rah rah on the last article or it will reject. If you show you have half a brain and know what you are doing then a re writing or stated words in such a way to come across as a trade signal will pass. Here on this blog I don’t pay much attention to proper grammar but in public writings especially to unknown readers the grammar story is different. I have fun at times testing the waters and even pushing the envelope.

I wrote about Fed Funds and General collateral rates and showed how the Fed will eventually push up Fed Funds. I knew it had limited chance and I was right as it received a big fat red rejection next to my name. I want desperately to write about commercial paper as the primary driver to DXY but I haven’t pushed that envelope yet, maybe FX street will give me a shot. I’m completing an article on deep analysis and floors V ceilings to currency prices but haven’t decided who to send it to or if I should even bother.

The vast majority of investing.com articles to find views is FX trading. The least is sadly bonds and yields which is why all guys write about on bonds is 10 year Treasury yields. Want to move ahead then do as I do and write about the entire yield curve, write about 10’s V 2’s, 10’s V 30’s. Use the same approach on different nations, compare spreads. All are not only viable topics but what do you think moves currency prices and nobody writes about this stuff. I tested the crowd of readers by writing articles on interest rates. Those articles receive not only less views but hardly a view. This says readers are easily post 2008 traders. But as usual investing.com is crowded crowded.

Fxstreet.com is much different. It takes an invite and approval before anybody reads one word written. Fxstreet checks out fully their writers. But how many readers, views. I don’t know. They allow postings everyday, investing.com has or had limits per week.

But fxstreet like investing.com appears crowded so my desire to continue posts is waning. Now I’m competing with world banks, big name analysts and fxstreet itself. My articles flow through the feed yet I don’t know views. For all I know this 2007 blog receives more views. And again, I don’t read one post on investing.com nor fxstreet because its just same old blah, blah, get your name out, be seen, use slick words as blah blah is presented. Readers here know how it goes. Its just the same old tired stuff. Fx desperately needs different views and perspectives. Tell you one guy Mike Scrive who writes at fxtrader magazine site. This guy is doing it nicely. He presents full story views, full analysis. The guy is good. His trade recs are very diversified and come with full explanations.

So my thinking at this stage is quit fxstreet and investing.com. I gave up already at fxtrader magazine and highly doubtful to ever post again at Modern Trader magazine as this month’s article is 3 months in a row. Any writings and trades will post here for interested. I’m not sending out on twitter nor fxstreet.net either. I’m pretty much done and hope I don’t get pulled right back in as Michael Corleone said in Godfather 3. I can’t compete in this world and no longer am I interested. Its just not fun anymore and its not like the old days when guys like me were paid nicely for articles. Nobody pays anymore. The whole world wants everything and expertise for nothing.

Brian Twomey