FX next week and yield curve inversions
Since the Fed’s last raise November 3, Fed Funds rate opens and closes at 3.83. The Fed Funds rate once traded freely on its own with highs and lows as any financial instrument. In 2000, Central banks implemented meetings every 6 weeks. Prior to 2000, central banks met anytime they desired and changed interest rates at their own discretion.
Traders were forced to factor Fed Funds for oversold and overbought status for possible changes to an unknown date to meetings. Fed Funds then was known as the discount rate and this rate is discounted to headline. The question was the spread and insight to possible interest changes.
Bernanke and Big Sis Yellen changed Fed Funds into an immovable fixed rate. Fed Funds moves every 12 points with every 25 point change to headline and remains fixed.
From 3.83, Fed Funds trades daily at its maximum 25 points and minimum 12 from 3.80 to 4.05. Yields are priced from Fed Funds and normally trade much higher rates.
The question to past yield curve inversions occurrs particularly when higher yields trade below lower yields especially the 10 to 2 rates. How serious is an inversion must be measured by the 10 year to 3 month to determine where was Fed Funds location in relation to inversions. Avoidance of recession in 6 months on a 10 to 2 inversion might nullify recessions by money supply adjustment.
Due to Fed Funds at Fixed rates, speculation to inversions under a completely different system as existed in past years happens when yields trade below Fed Funds rather than the old definition of 10 to 2 year crossovers and imminent economic danger.
Under the new speculation to inversions, the 30, 10 and 7 year yields meet the criteria to inversions as Yields trade below Fed Funds by 11, 15 and 3 points at 3.72, 3.68 and 3.80.
Further, interest on reserves or IOR trade 3.90, SOFR 3.80 and 3.76 for Tri Party and Broad collateral rates.
Fed Minutes released yesterday revealed Treasury Markets were functioning normally.
The overall assumption is yesterday’s inversions and recession no longer applies as the criteria pertains to a systemic condition that no longer exists.
Best trades for next week are short to severely overbought EUR/CAD, GBP/CAD, AUD/CAD and NZD/CAD. All are subject to Gap openings on Sunday night.
Next is deeply overbought EUR/USD, GBP/USD and NZD/USD.
AUD/USD is excluded as it imposes a different set of circumstances than EUR, GBP and NZD/USD.
When AUD/USD traded 0.6500’s and 0.6600’s, AUD/EUR also traded in lock step to AUD/USD at 0.6500’s and 0.6600’s. This marriage left EUR/AUD paralyzed to movements over months. AUD/EUR now trades 0.6480 or EUR/AUD 1.5413 and AUD/USD at 0.6700’s. AUD/USD lower must break 0.6673 and AUD/EUR 0.6552 or EUR/AUD 1.5262. AUD/USD and AUD/EUR remain in a tight relationship.
EUR/AUD or AUD/USD requires a wider range movement to break the AUD/USD and AUD/EUR relationship and force a better trade for both currencies. Until this happens, AUD/USD and EUR/AUD will suffer to total range movements and reduced profits.
Overbought EUR, GBP and NZD/USD is the direct result of DXY. Last week big lines above were located at 107.81 and 108.34 and DXY traded to 108.01. DXY above averages now exist at 106.81, 108.27 and 108.42 and 109.29. DXY averages above are dropping slowly as weeks progress.
DXY traded 232 pips this week Vs EUR/USD at 226. DXY targets 105.05 this week and another 200 pip range week.
USD/CAD as a result of DXY averages, faces many and massive lines at 1.3400’s and 1.3500’s on a short only strategy. USD/CAD first major line is located 1.3329. USD/CAD averages above are droppoing slowly every week along with DXY.
USD/JPY last week 139.44 to 140.29 or 141.15 and 142.01. Highs traded to 142.24 and lows at 138.02 on the break ay 139.44.
USD/JPY this week: 137.76, 139.29 and 140.05. Above 140.81 then higher for USD/JPY. Overall, USD/JPY will follow DXY lower.
EUR/NZD long for next week anywhere at 1.6500’s. AUD/NZD trades massive oversold while GBP/NZD also heads long but least favored. EUR/NZD is the best of the 3 currencies.
GBP/JPY and NZD/JPY trade overbought while EUR/JPY waits for a resolution at 143.29 and oversold to AUD/JPY and deeply oversold CAD/JPY. JPY cross pairs lack uniformity.