Currency market: Fed funds, EUR/USD and USD/JPY
|Fed funds futures' probabilities of future rate changes by:
Dec 2022 up by at least 25 bps 95.4%, down from 98.1% last week.
Dec 2022 up by at least 50 bps: 77.2%, down from 86.8% last week.
Feb 2023 - up by at least 25 bps: 96.6%, down from 98.3% last week.
The above percentages were factored from Treasury yields and are wrong. To factor actual probabilities correctly, 3 sources are paramount: Fed funds, Eurodollars, and the 90-day interest rate.
The 90-day interest rate is most vital to all markets and all economies as the first short-term rate was established under Hoover in 1929 to fund the government. The Canadian central bank maintains 90-day rates for many nations from the first day of introduction.
Eurodollars are secondary to the actual Fed funds source to factor probabilities because Eurodollars are quoted, settled, and traded by the 90-day rate and Eurodollars are offshore interest rates represented by Libor. Eurodollars answer the question of how much money is held by banks overseas and at what specific rate.
Fed Funds as the onshore rate and Eurodollars are interest rates but specifically deposit rates. Exchange rates and currency trading is the trade of bank deposit rates. My daily trades are based on deposit rates and explain why daily trades are always correct.
Seen daily is reported probabilities to interest rate raises. This is the factor of Fed Funds and /or Fed Fund and Eurodollar Futures contracts. Contract prices change daily so therefore must probabilities change with contract prices.
Recall the RBNZ article and offered was a 43% chance to a raise or 67% to no raise. The RBNZ raised. How good were the factor to OCR and the 90-day rate as a forecast to probabilities? Zero.
As the Fed Meeting draws closer to raising reporting, chances are good the probabilities are within a fairly correct range. Chances are better than today's probabilities which are wrong to an event 1 month away from today. This month is December and a new 3-month contract becomes pertinent as August now disappears from existence.
Fed Funds reported today as 0.08 and yesterday as 0.07. Fed Funds is related to Eurodollar Futures contracts as opposites. 100 - 8 or 1.00 - 0.08 = 92 as the Eurodollar contract. 100 - 7 = 93 or 93 represented as a Eurodollar futures contract.
To answer correct probabilities, today and in the future, it's imperative to run Fed Funds data. Eurodollar contracts are offered for 10 years in the future so it's imperative to run at least 10 years of Fed Funds data. More if necessary.
Answered to correct probabilities is Fed Funds oversold, overbought, or sits doing nothing in ranges. By running the data is answered easily correct probabilities and permanent as well as a target price. The data offers not only a target price and probabilities but ranges to the actual price. The target price is far more vital than any probabilities.
Suppose the data reveals a deeply oversold Fed Funds rate. The trade is long financial instruments associated with a higher fed Funds rate and short financial instruments to an overbought rate. Probabilities become secondary.
Raise or not, what is the Fed imparting by a 25 point rise. Nothing except Fed Funds remains in a tiny range in between positive and negative probabilities. Nothing to the overall curve. Nothing to exchange rate moves. Probabilities remain permanently bounded by 34% on either side of current prices. It's highly unlikely the Fed moves outside of the 34 % boundary lines.
Note RBNZ raised twice or 50 points and zero effect to the exchange rate.
Nothing to the curve for exchange rate traders but a giant significance to interest rate traders. The smartest traders among us are interest rate traders and worthy to follow if found. New Zealand's 10-year yield dropped 13 points since the last raise, 8 points to the 5 years and 2 points to the 2 years.
Interest rate traders must be exact to their trades due to trade in tiny ranges. Fed Funds for example trades today from 0.08 to extremes at 0.06 to 0.12. Chances are good 0.12 doesn't trade unless markets are hit hard by an unexpected outside event.
EUR/USD vs USD/JPY
Current EUR/USD at 1.1301 and USD/JPY at 113.23. Both are exact opposite currency prices by Correlations and standard for currency markets. Both currently offer the same exact price. Watch for crossovers then take the trades in the direction of the cross. The current spread is 27 pips. Factor 27 pips to the trade and voila, profits exist without doing anything.
NFP? 50 pips if lucky
EUR/USD 5 vital numbers for today. 1.1239, 1.1254, 1.1267, 1.1324 and 1.1353.
USD/JPY 5 vital numbers for today. 112.66, 112.81, 112.92, 113.51 and 113.82.
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