The Currency Market, H15, GBP and Interest Rates

Federal funds (effective) 1 2 3 1.55 1.55 1.55 1.55 1.60

Commercial Paper 3 4 5 6

Nonfinancial

1-month 1.57 1.54 1.54 1.56 1.57

2-month 1.53 1.56 1.56 1.55 1.55

3-month 1.55 1.57 1.57 1.56 1.55

Financial

1-month 1.55 1.56 1.54 1.54 1.60

2-month n.a. n.a. n.a. n.a. n.a.

3-month 1.61 1.65 1.58 1.58 1.63

Bank prime loan 2 3 7 4.75 4.75 4.75 4.75 4.75

Discount window primary credit 2 8 2.25 2.25 2.25 2.25 2.25

US government securities

Treasury bills (secondary market) 3 4

4-week 1.51 1.50 1.50 1.49 1.56

3-month 1.51 1.52 1.54 1.53 1.54

6-month 1.51 1.53 1.54 1.53 1.53

1-year 1.51 1.50 1.49 1.47 1.44

Treasury constant maturities

Nominal 9

1-month 1.54 1.53 1.53 1.52 1.59

3-month 1.54 1.55 1.57 1.56 1.57

6-month 1.55 1.57 1.58 1.57 1.57

1-year 1.55 1.53 1.53 1.51 1.48

2-year 1.49 1.44 1.45 1.42 1.41

3-year 1.48 1.41 1.45 1.39 1.37

5-year 1.51 1.44 1.47 1.41 1.39

7-year 1.61 1.52 1.56 1.51 1.49

10-year 1.70 1.61 1.65 1.60 1.57

20-year 2.00 1.91 1.95 1.89 1.88

30-year 2.14 2.05 2.10 2.05 2.04

Fed Funds on Thursday jumped an abnormal 5 basis points from 1.55 to 1.60. Last time an exorbitant move to this degree traded was Oct 16. Why 5 basis points is unusual and from Fed Funds directly is because central banks redesigned their own interest rate systems due to Libor elimination.

The new focus for all central banks is to maintain Fed Funds and central bank overnight rates contained within tiny ranges over long periods until a change in headline interest rates. Fed Funds for example since Oct 30, traded 1.54 to 1.58 and closed at 1.55 for 48 days vs 60 trade days.

By enforcing no movement to overnight rates allows interest rate maturities to not only trade below overnight rates but interest rate maturities must perform the daily and necessary interest rate obligations.

Prior to central bank interest rate redesign, interest rate maturities dictated to overnight rates and overnight rates would comply by trading in wider ranges. Central banks turned the prior system upside down in a new dictatorial approach to interest rate markets. Control the interest rates then commands ability to control all market prices including and most especially FX as market prices and interest rates are synonymous as drivers to prices, trends and movements.

The 5 basis point move Thursday lasted into Friday and explains higher moves to GBP, EUR and risk pairs and the massive drops to USD currencies. Thursday’s moves however severely disrupted the weekly balance to currency prices as GBP skyrocketed from deep overbought to extremes, AUD and USD pairs dropped to extremes from deep oversold. Despite the moves, the trades were untouchable. Pick any currency pair and it opens this week in extremes.

The GBP reverses today  are the direct  result of 1.60 and its retracement.