@peterknightadvisor.com, Peter Knight Advisor,Automated Trading Accounts, Futures,

How China’s race to reserve currency status will rock markets

The inclusion of the Chinese renminbi into the basket of IMF’s reserve currencies will radically transform global markets and developing countries’ central banks policies.

That’s according to Ashmore’s head of research Jan Dehn, who shared his views during a press roundtable on Tuesday.

Dehn believes China, which underwent a market correction over the past 10 days, is planning to attract long-term institutional investors, including foreign central banks, into its domestic market.

This is why labelling the renminbi a global reserve currency is crucial – it means that central banks, and not just short-term retail investors, will be buying the currency.

‘97% of all global reserve currencies are in Japanese yen, euro, British pound and US dollar. All these four central banks are currently printing money to stimulate their economy. This means that the world will be soon in serious shortage of global reserve currencies,’ he said.

Dehn thinks China is actively and aggressively responding to this major trend initiated by developed markets, which is likely to cause an appreciation of the renminbi.

‘China knows it sits on a time bomb. Developed markets are trying to find their way out the crisis by creating inflation and weakening their currencies rather than implementing structural reforms. This is going to make the renmimbi appreciate to an unsustainable level.’

The Chinese authorities’ plan is therefore to make international investors tap into its currency as soon as there is a more pronounced shift away from QE-driven currencies, according to Dehn.

A new sovereign wealth fund

Dehn said China would no longer need its foreign exchange reserves once its reaches global reserve status. He compared it to the US, which currently has hardly any foreign exchange reserves.

‘This means that China’s foreign exchange reserves, nearly $4 trillion, will become a sovereign wealth fund, which is not going to be invested in US dollar, but in global infrastructure, private equity and alternatives.’

‘It’s therefore very likely that China, over the next few years, may become a steady seller of US treasuries and buying other assets,’ he added.

‘Going forward, this will be a much larger investment programme involving sovereign wealth fund-type activities all over the emerging world. Other EM central banks such as Mexico’s and India’s will be looking very closely at what China is doing and trying to join the global reserve currency club.’

Financial big bang

Looking at Chinese fixed income, Dehn thinks the municipal bonds market is the most exciting part of the sector at the moment. He highlighted that currently China has 11 trillion RMB ($1.77 trillion) of local government debt, mainly on banks’ balance sheets.

This debt has been swapped into tradable bonds in order to transmit monetary policy signals down to local government level and manage the country’s macro economy.

‘Next step is to stimulate consumption – China has a savings rate of 49%, which represents a great room to increase spending. They will have to reduce people’s precautionary savings putting bonds into their portfolios as at the moment they can just invest in property and stocks,’ he said.

Increased consumption, Dehn argued, will drive imports and worsens the country’s account surplus. ‘The country is opening its domestic market to foreign investors to offset this trend. The market cap of the equity and bond market in China is $15 trillion, which almost equals US GDP.’

‘This is the biggest big bang in world’s economic history – never has a market the scale of the US economy been opened to international investors.’

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Expectations for today’s FOMC June policy meeting –

The following are the expectations for today’s FOMC June policy meeting as provided by the economists at 22 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.

Goldman: The overarching message from the meeting will probably be that September remains the Committee’s baseline expectation for the start of monetary tightening, reflecting cumulative progress in the recovery over the last six years. While September remains our baseline as well, we think that the FOMC will want to preserve optionality at the June meeting, and there is still a significant probability that the hiking cycle will not begin until December or later. We expect the content of the Summary of Economic Projections (SEP)—released coincident with the FOMC statement—to be updated to reflect the recent economic data. The unemployment rate path will likely be slightly higher in the near term, while long-term views on the natural rate of unemployment may come down further. Participants’ assessment of the inflation outlook will probably be little changed. Most importantly, we think that both the median and modal “dot” will remain at 0.625% for 2015, consistent with two twenty five basis point hikes this year (beginning in September). However, most other aspects of the dot plot will probably show a dovish shift, reflecting softer H1 activity and the Fed’s “data dependent” mantra.

Barclays: Markets will pay close attention to the tone of the FOMC statement on Wednesday and watch for hints on the timing of the first rate hike. Given the recent pickup in US consumption and labor market data, we think the Fed is likely to maintain its view that the winter slowdown was transitory and that the economy is likely to expand at a moderate pace. Indeed, the pace of job growth has picked up, with payrolls rising 280K in May, and the Fed’s LMCI has increased since the April meeting. Additionally, we expect the Fed to reiterate that inflation will gradually rise toward the 2% target in the medium term as the labor market continues to improve and inflation expectations remain stable. Indeed, CPI data on Thursday, along with the latest import price data, should support our view that downward pressures on domestic core inflation from the lagged effects of USD appreciation will begin to wane going into the third quarter. As such, we continue to think the Fed is on track to hike twice this year (at the September and December meetings). Overall, we believe that the FOMC statements, along with CPI and other macro data, should support the USD

UBS: We expect Chair Yellen to continue setting the stage for the start of the Fed’s tightening cycle later this year. If market expectations are correct, the June FOMC meeting will be the last quarterly update to the FOMC’s forecasts before the Fed at the September 16-17 FOMC meeting hikes rates for the first time in more than nine years. (The previous rate hike was on June 29, 2006.) As a consequence market participants are focused on the upcoming meeting despite no expectation that the Fed funds target rate will be immediately increased. We do not expect the post-meeting statement, the forecast or the press conference to prompt a rethinking of current market expectations. As of Friday the markets were pricing in a bit more than 75% chance of a rate hike at the September FOMC meeting. We believe the FOMC is currently comfortable with that view and is cognizant of the fact that there are ample opportunities to reset market expectations, if needed, before the September meeting.

Deutsche Bank: The statement should have a more positive tone, especially regarding the labor market. Our forecasts of the Fed’s central tendencies are shown in the table below. Despite a reduction in 2015 GDP, we do not believe the median 2015 fed funds dot will change. Any reduction in the median 2015 dot would immediately focus market participants’ collective attention on the December meeting, and the Fed surely wants the option to hike in September, data permitting…Regarding the press conference, Yellen will reaffirm the case for beginning the process of policy normalization sometime later this year. The Fed Chair’s May 22 speech was telling in that she subtly shifted the conversation from outlining why the Fed may begin raising interest rates to how far and how fast they may go after liftoff. She may choose to elaborate on some of the themes of that speech, including productivity growth. In short, we expect the Fed Chair to continue to de-emphasize the timing of liftoff and focus financial market participants on the factors the Fed will be taking into account in determining the pace of policy normalization.

BNP Paribas: We expect today’s FOMC statement to acknowledge improvement in key data after transitory factors suppressing Q1 activity abated. In the subsequent press conference, Chair Yellen will likely continue to emphasize that rate hikes are likely coming at some point later this year. However, the meeting may not provide a decisive catalyst for the US currency. Our economists note that the FOMC’s projection ‘dots’ are likely to shift in a dovish direction as the more hawkish members acknowledge that tightening will not begin in mid-2015. The Committee and Chair Yellen will also need to explain its decision to leave rates unchanged now and be sure to avoid signalling lift off at the July meeting. Rate markets remain underpriced relative to our expectation for tightening to begin in September but we may need to wait for more economic data and subsequent Fed communications before we see an adjustment to our view

Credit Suisse: We expect the FOMC to acknowledge the improvement in US economic statistics since the reported contraction in 1Q. But the rebound in activity is still building momentum and has not been sufficiently conclusive, in our view, to prompt the Fed to tighten policy as soon as this month. Also, while we do assign a small positive probability to a July rate hike, say 15%, we believe September to be the most likely date for policy lift-off. Various scenarios related to the June 16–17 meeting include the possibility of more explicit guidance in the policy statement on the timing of a rate hike (not likely in our view) and downward revisions to GDP growth forecasts.

Nomura: The FOMC is likely to clearly keep September lift-off on the table when it meets this week. After better data momentum, the text of the statement is likely to sound more confident, and the dots are likely to signal that a two-hike scenario in 2015 is still the central case. While one hike has again become the central case, a two-hike scenario is still priced with a fairly low probability. We think the two-hike scenario is around 60% probability, and if this is true, the short end has more room to sell off.

SocGen: The risk at this evening’s FOMC meeting is, that while the underlying economic vies are reasonably upbeat and consistent with ‘lift-off’ happening in September, the (in)famous ‘dot-path’ will be lowered enough to be the main talking point. The FOMC ‘dots’ project 2 rate hikes this year and 5 next, so a total of 1.75% in hikes by the end of 2016. The Fed Funds futures price a 1% rise in rates over the same period, and our economics team expects the dot-plot to be cut back to 125bp. Is the market going to see this as a non-event, affirmation that too little is priced in, or a dovish signal? I rather fear the last of these may win the day but all will be clearer at 19:00 BST or, more likely after 19:30 when the press conference allows Janet Yellen to send the signal she wants. Either way, the bigger move is more likely to come in July/August as data convince people that a hike is coming

Credit Agricole: We expect no changes to rates at the June FOMC meeting and continue to expect rate normalization to begin in September. No rate hikes are expected as policymakers continue to assess progress towards conditions conducive for lift-off. These include (1) continued improvement in labour market conditions and (2) reasonable confidence that inflation will move back to its 2% objective over the medium term. We believe the Fed is close to meeting its employment mandate. However, the Fed is likely to require more evidence before being reasonably confident that inflation will rise towards its 2% objective over the medium term. Assessing the transitory impacts on growth and the economy’s underlying momentum will require more time. However, we believe that the FOMC will see evidence that the conditions for lift-off have been met by the September FOMC meeting. The updated Summary of Economic Projections (SEP) will likely lower GDP growth projections for 2015 in light of the Q1 GDP contraction. We believe most Fed officials expect to begin hiking rates this year. The year-end 2016 median fed funds rate projection may come in slightly below the March projection, in line with the gradual pace of anticipated rate normalisation.

ANZ: Market focus will turn to the FOMC meeting this week and there are three areas to watch for the USD. The first is any commentary on the USD – there has been an increase in official rhetoric about the strength of the USD negatively impacting on the US of late, and this is important for the medium-term USD path. The second is economic growth projections. The market and ANZ expects the Q1 GDP weakness to lead to official 2015 growth forecasts revised lower. The final area to focus on is the ‘dot points’.

RBS: The key hawkish risk at this week’s June FOMC meeting may come from the signaling language. The April meeting minutes revealed that the Fed discussed (and opted not to) give a broader signal that rate hikes were coming soon – any direct step to “prepare” the market for a rate hike via the press conference or statement language would likely be a USD positive. With only 6-months to go before year-end, the market may put focus on the near-term FOMC “dot” projections released this week, where the median currently suggests the Fed can hike twice before year-end. No change in the dot point projections for 2015 could be seen as a positive as only one hike is priced in for the remainder of the year. The well-telegraphed sluggish start to the economy may result in a downward revision to 2015 growth forecasts, and that may leave risks to the “dot point” Fed Funds rate projections as moderately to the downside. Even so, we think the Fed sending a message about increased confidence in their positive outlook may overshadow a revised growth profile.

Lloyds: While a hike in interest rates at today’s FOMC meeting looks highly unlikely, the meeting could still provide clues about the timing of a first move. An important indication of the likelihood of a relatively early rise in rates will be the extent to which the post-meeting statement is more upbeat about recent economic developments compared to the last meeting in April. Markets will also look for hints from Chair Yellen’s post-meeting press conference for the timing of lift-off. However, the Committee will probably be reluctant to add anything to previous comments that any move will be “data dependent”. Finally, the updates to FOMC participants’ interest rate forecasts (the ‘dot plot’) will show whether most still expect interest rates to rise this year, and their expected path over both the short and longer term.

Standard Chartered: Buoyed by improving data (including May payrolls and retail sales data), and by tentative signs of a pickup in wages, we think the Fed will indicate that the first rate hike is getting closer, supporting our longheld view that the Fed will move in September. We see some pushback on the IMF’s suggestion to wait until 2016 due to risks of increased volatility “in the US and abroad”. This said, we think Yellen will emphasise that the subsequent tightening path will remain very gradual, highlighting that the first steps represent removal of excessive accommodation, not tightening of policy. This is likely to be echoed by falling ‘dots’, which may move closer to (but still not match) the current market pricing, particularly further down the curve. We see the ‘terminal rate’ median moving down by c.25bps as the Fed reduces its assessment of potential growth and productivity. We think the overall tone of the statement and Yellen’s comments will cause the short end to bring forward its ratehike expectations. Indeed, we expect the median end2015 ‘dots’ to remain at 0.625%, implying two hikes by yearend. However, the further decline in the longerterm median ‘dots’ that we expect, along with another decline in the Fed’s projection for potential growth, should keep the 10Y sector relatively protected.

Westpac: We expect the FOMC to reinforce our expectation of a Sep funds rate hike (from 0-0.25% to 0.25-0.5%), though of course Chair Yellen should stress ongoing data dependence. The release of quarterly forecasts by FOMC members plus the Yellen press conference 30 minutes later means markets will have plenty to absorb, with volatile trade likely. Given the dismal Q1 GDP report, forecasts for 2015 should be cut notably, with 2016 expectations probably lowered too. Inflation forecasts could also be nudged a little lower.
However, the general tone of the statement and Yellen’s press conference should be positive, with evidence on jobs, retail sales and housing pointing to a rebound in growth in Q2, setting up for solid expansion in H2. The “dot plot” of expectations for the funds rate by end-2015 should consolidate around 50bp of tightening this year, more than priced in. Combined with the press conference, this should see USD emerge firmer from the meeting.

Citi: FOMC unlikely to support USD or rates this time around. The market pivots for FOMC are: 1) How on track the Fed sees the US economy for liftoff and how concretely they signal a September liftoff 2) The 2015 dots are likely to show a big shift down – their problem is that it is difficult to convey neutral, which is 1 hike likely, 2 possible, but no commitment unless data turn out right. We go into this seeing the Fed as leaning to dovish, and hence somewhat USD negative. They do have not much incentive to sound concrete about a September hike this far in advance and would not want asset market reaction in advance of an anticipated September hike to derail an actual September hike. Both their commentary and the dots shifts are likely to be less committal to a hike than the market now expects.

ING: We see this week’s June FOMC as crucial in shifting the focus for markets back to short-term US rates and the theme of monetary policy divergence. Market pricing for the timing of a Fed lift-off has been moving in the right direction, with the probability of a 25bp rate hike in September increasing from 35% to 55% following the robust NFP and retail sales prints. The anomaly of EUR/USD moving higher last week may insinuate pent-up USD strength and we see scope for a sharp move lower once the pair’s relationship with short-term rates normalises.

SEB: We do not expect a rate hike at this meeting. No major changes to June statement are excepted although the fact on recent pick up in data should be noted. The Fed’s new forecasts will also be key focus. The downward revision to its growth outlook will suggest that the pace of rate hikes to be more gradual. In the press conference the market will look for if Yellen’s comments carefully paves the way for a September rate hike. Moreover, what is her take on the international developments (for example the situation in Greece)?

Danske: The updated ‘dots’ will attract a lot of attention and we believe that several members have lowered their expected path for the Fed funds rate. In terms of the statement we expect the tone to be slightly more upbeat than in April given the latest more positive run of US data but we do not expect any major changes in the forward-looking part of the statement. At the following press conference key will be the FOMC view on how much of the Q1 economic weakness is likely to be temporary and how this, combined with the most recent more positive data, has affected its economic outlook.

BTMU: The overall message from Fed Chair Yellen is likely to be that the Fed remains on course to begin raising rates later this year if the economy performs as expected, although the exact timing of the first rate hike is likely to remain unclear. She is also likely to reinforce the message that the expected pace of tightening is expected to be gradual. For the interest rate market the message from the Fed is unlikely to be a big surprise which is already discounting a more dovish outlook for Fed policy. The updated Fed projections will merely move their thinking further into line with the interest rate market. The US dollar may weaken modestly initially if the Fed funds rate and growth projections are lowered. However, the US dollar already appears to trading on the weaker side of yield spreads heading into the FOMC meeting which should help limit further downside potential. Incoming economic data will remain important in determining the outlook for Fed policy and US dollar direction. If the recent improving momentum in the US economy and strengthening wage growth is sustained it is likely to make the Fed more comfortable about raising rates which may still be delivered as early September. In these circumstances, we expect that any US dollar weakness following the FOMC meeting will likely prove short-lived.

CIBC: The Fed will likely sound more confident that the first quarter slowdown was indeed “transitory”, although the updated “dot plot” projections for interest rates have a greater chance of moving markets if they differ materially from March.

BofA Merrill: This week’s FOMC meeting will be pivotal, but not because a rate hike is likely. Indeed, the rates market sees a near-zero probability of a hike in June, despite Friday’s strong employment report (Chart of the day). The July meeting is expected to be a non-event as well, with just 2.5bp of slope priced into the inter-meeting forward OIS curve. Unsurprisingly, the market is treating September as the first truly “live” meeting. Market-implied odds of a September liftoff have increased somewhat over the past few weeks as data have improved, but with 10bp currently priced in, the market remains unconvinced a September hike is likely. This likely reflects lingering uncertainty about the prospects for a growth rebound after a disappointing start to the year. However, our 2Q GDP tracking model now stands at 2.9%, as Ethan Harris notes in his latest Ethanomics. With growth picking up, September remains our base case for the first Fed hike, a view that was affirmed by the latest employment report. In light of this, we reiterate our Aug-Oct 2015 forward OIS curve steepener recommendation (11 bp), which we continue to see as a cheap way to position for a September rate hike.

NAB: the Fed will release its new set of growth, inflation and unemployment forecasts and its “dot point” FOMC member forecasts for the Fed funds rate. No one expects any change in the Fed funds rate, though markets remain priced toward Fed rate lift-off later this year. NAB’s core view remains for Fed Funds rate lift-off will be announced at the 18 September FOMC, with clearer evidence of returning US economic growth and thus confidence in the Fed reaching its 2% PCE inflation target. The FX and bond market will be paying close attention to the Fed Policy Statement, to what Fed Chair Yellen has to say in her press conference, and new US economy forecasts, with particular forecasts on those dot point estimates of the Fed funds rate for the end of 2015, 2016 and 2017. The previous median of the dot points at the March 18 FOMC (its most recent set of forecasts) had a median Fed funds forecast of 50-75 bps for the end of 2015 and 1.75-2% for the end of 2016. The US market at the end of last week was 53% priced for a September 18 lift-off. If the Fed hangs tough and hold to its median Fed Funds forecast for end 2015, that would be supportive of short-term US yields and we expect the USD.

Capturing the first leg higher in interest rates –

Below is a 10K aggressive strategy to capture the first leg higher in interest rates.
Click here for 5k less aggressive position, click here for currency program updates.

1) Maximum risk = -$7,938 between now and March 31, 2016
2) Net profit at our objective = +78,521

3) Trading this rates higher requires a short position.
4) To convert contract price into rate it represents take 100.00 – contract price = rate
xxEach 0.01 change = $41.67 per contract

5) Click here to enlarge the chart below

6) Click here for the Federal Reserve meeting schedule
7) Click here for the last tightening cycle 2004-2006 from 1.25% to 5.25%.

8) Click here to open an account.

To experiment with any potential outcome for this trade

9) Click here and open the March 2016 10K risk reward spreadsheet (aggressive hedged)
10) Click here for March 2016 (ZQH16 ) quotes

11) Enter any price in cell B-2
12) The rate the contract price represents shows in C-2
13) Net profit/loss E-2
14) Position liquidation value F-2

15) Maximum loss if the Fed funds rate goes to -1.00% and stays there (-$7,937.50)

16) Net gain at our profit objective +$78,520.90

Support

17) What the Fed funds rate is and how it’s set
18) Click here for videos of where the Fed sees rates and when
19) Click here and here for media stories
20) We have 7 Fed meetings to determine U.S. rates between now and March 31, 2016

State of affairs

21) U.S. economy by the numbers
22) China’s economy by the numbers & World currency status
23) Where the Fed sees rates, when and what the move is worth
24) Real & Rand Carry trades

Additional reports and programs are available for any major market on the following exchanges.

25) US CME
26) Eurex
27) Euronext
28) Osaka

29) My team can establish and monitor all positions according to your criteria

30) Our Structure

Fees
Front load = 0.00%
Management fee 0.00%
Inventive Fee = 10.00% of net new high profits quarterly

To open a test account

31) Direct FX opening instructions
32) The world’s largest dollar volume exchange group
33) CME videos
34) Due Diligence and how funds are protected
35) Commodity Futures Trading Commission

Accounts can be funded and maintained in any major currency.
Liquidity in portion or all is 2-48 hours in any major currency.

If you have questions or would like additional information please call with this page available.

x

Click here for contact details

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RISK DISCLOSURE STATEMENT

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS.

THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

BID/ASK SPREADS, BROKERAGE COMMISSION, CLEARING, EXCHANGE AND REGULATORY FEES WILL HAVE AN ADVERSE IMPACT ON THE NET OVERALL PERFORMANCE OF YOUR ACCOUNT. PRIOR TO MAKING A DECISION TO PARTICIPATE IN ANY INVESTMENT MAKE SURE YOU FULLY UNDERSTAND THE FEES ASSOCIATED WITH TRADING.

THE INFORMATION PROVIDED IN THIS REPORT CONTAINS RESEARCH, MARKET COMMENTARY AND TRADE RECOMMENDATIONS. YOU MAY BE SOLICITED FOR AN ACCOUNT BY ONE OF OUR REPRESENTATIVES OR EMPLOYEES. IT SHOULD BE KNOWN THAT THE REPRESENTATIVES OF ANY FIRM MAY TRADE FUTURES AND OPTIONS FOR THEIR OWN ACCOUNTS OR THOSE OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS MARGIN REQUIREMENTS, RISK FACTORS, TRADING OBJECTIVES, TRADING INSTRUCTIONS, TRADING STRATEGIES, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE LIQUIDATION OR INITIATION OF FUTURES OR OPTIONS POSITIONS MAY DIFFER FROM THE OPINIONS AND RECOMMENDATIONS FOUND IN THIS REPORT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN DERIVATIVE CONTRACTS CAN BE SUBSTANTIAL THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING ANY LEVERAGED POSITION AND MUST BE IN A POSITION ASSUME LOSS FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR TRADE RESULTS.

PLEASE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND RESOURCES.

Trading short term rates higher –

1) Maximum risk on this trade = -$3,467 through 31 March 2016
2) Net profit at our objective = +35,283
3) Minimum deposit per position 5K or major currency equivalent

Trading rates higher requires a short position
To convert price into rate it represents take 100.00 – contract price = rate
Each 0.01 change in contract price = $41.67
What the Fed funds rate is and how it’s set

Click here to enlarge the rate, contract price, contract valuation chart below

To experiment with any potential outcome for this trade

4) Click here and open the March 2016 risk reward spreadsheet (hedged)
5) Click here for March 2016 (ZQH16 ) quotes
6) Enter any contract price in cell B-2
7) The rate the contract price represents shows in C-2
8) Net profit/loss E-2
9) Position liquidation value F-2

10) Maximum loss if the Fed funds rate goes to zero and stays there = -$3,467

11) Net gain at our profit objective = +35,283

Support links

12) Click here for videos of where the Federal Reserve sees rates and when.
13) Click here and here for 400+ reports on where the market/media expect rates and when.
14) Cick here for the Federal Reserve’s meeting schedule & corresponding closing statements.

State of affairs

15) U.S. economy by the numbers
16) China’s economy by the numbers & World currency status
17) Where the Fed sees rates, when and what the move is worth
18) Bernanke’s calls prior to the “great recession”

Additional reports are available for any major market on the following exchanges.

19) US CME
20) Eurex
21) Euronext
22) Osaka 2

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Disclosure

RISK DISCLOSURE –

The risk of loss in trading foreign exchange can be substantial. You should therefore carefully consider whether such trading is suitable in light of your financial condition. You may sustain a total loss of funds and any additional funds that you deposit with your broker to maintain a position in the foreign exchange market. Actual past performance is no guarantee of future results. Simulated performance results also have certain limitations unlike actual performance records, simulated results do not represent composite trading. Also, since trades have not actually been executed for this composite, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity, simulated trading results, in general are also subject to the fact they are designed with the benefit of hindsight. No representation can or is being made that any trading system will, or is likely, to achieve profits or losses similar to those shown in this simulated performance record.

The performance records have been calculated in a manner we believe to be reasonable and is based on the respective leverage factors intended to be used. Prospective investors must recognize that any simulation of a hypothetical record, even when based on actual trading systems, with qualified trade execution, has inherent limitations. We believe that the records as presented should be of interest to investors in determining whether to participate, such rates of return should by no means be taken as an indication of how the system will perform or would have performed, even given the same trades. Any performance record compiled from individual performance records of any trading methodologies has certain hypothetical and artificial characteristics and must be evaluated accordingly.

The risk of loss in trading commodities can be substantial.You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.In some cases, managed commodity accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. The disclosure document of a commodity trading advisor (“CTA”) contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

What capturing the long term move higher in rates is worth

Trading rates higher requires a short position.

1) Click here to enlarge the valuation chart below, here for current quotes.

2) Click here for where the Fed sees rates & when

3) To convert contract price into rate it represents take 100.00 – contract price = rate
4) Current Fed funds contract price 99.55 (ZQH16), rate 0.45%, value = $1,875
5) Each 0.01 change is price = $41.67 (up = -$41.67, down +$41.67)
6) Contract price at the September 2013 low 98.60, rate 1.60%, value = $6,667

To experiment with any potential outcome for this trade

7) Click here and open the March 2016 risk reward spreadsheet (no hedge)

Enter any contract price into cell B-2
Net profit or loss will show in cell E-2
Liquidating value shows in cell F-2

Hedged strategies with a higher return on risk

8) March 2016 100
9) March 2016 25
10) March 2016 10
11) March 2016 5

If you’d like me to review this and other strategies for trading global rates higher through 2018 contact me.

Major events on deck that will generate major market moves across the board

12) Click h ere China’s currency the Renminbi joins the world’s reserve currencies October 2015

13) Click here The U.S. can no longer service 18 trillion in debt with only 1.8 trillion in annual tax receipts, the current national debt to tax receipt ratio is unsustainable and now irreversible.

With China’s currency the Renminbi on deck to become a world reserve currency in October 2015 I believe will see major market moves in currencies that could rival 2008 below are several programs to capture these moves.

14) Our Structure

Fees
Front load = 0.00%
Management fee 0.00%
Inventive Fee = 10.00% of net new high profits quarterly

To open a test account enabling you to get comfortable with our team

15) Direct FX opening instructions
16) Clearing and Exchange Members for larger accounts
17) The world’s largest dollar volume exchange group
18) CME videos
19) Due Diligence and how funds are protected
20) Commodity Futures Trading Commission

If you have questions or would like additional information please call
with this page available.

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Click here for contact details

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RISK DISCLOSURE STATEMENT

Program availability is dependent on your country of residency; assets, experience and net worth please contact us for details.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR.

IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADE PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF THE HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

THE INFORMATION PROVIDED IN THIS REPORT CONTAINS RESEARCH, MARKET COMMENTARY AND TRADE RECOMMENDATIONS. YOU MAY BE SOLICITED FOR AN ACCOUNT BY PRIMARY ASSETS MANAGEMENT OR ONE OF ITS REPRESENTATIVES OR EMPLOYEES. IT SHOULD BE KNOWN THAT THE REPRESENTATIVES OF PRIMARY ASSETS MANAGEMENT MAY TRADE FUTURES AND OPTIONS FOR THEIR OWN ACCOUNTS OR THOSE OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS MARGIN REQUIREMENTS, RISK FACTORS, TRADING OBJECTIVES, TRADING INSTRUCTIONS, TRADING STRATEGIES, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE LIQUIDATION OR INITIATION OF FUTURES OR OPTIONS POSITIONS THAT DIFFER FROM THE OPINIONS AND RECOMMENDATIONS FOUND IN THIS REPORT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE “RISK DISCLOSURE” WEBPAGE ACCESSED AT THE TOP OF THE HOMEPAGE. PRIMARY ASSETS MANAGEMENT IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE.

China by the numbers & world currency status –

Banks calling for a new world reserve currency
IMF/World Bank news
China & the IMF

U.S. versus China’s growth, U.S. in blue, China in red

1) Click here for a current Fed chart

U.S. Trade surplus or deficit

2) Click here for a current chart

China trade surplus or deficit

3) Click here for a current chart

U.S. versus China’s debt to Gross Domestic Product (GDP)

4) Click here for a current chart

U.S. versus China’s interest rates

5) Click here for a current chart

Some 95 per cent of all global foreign exchange reserves are invested in just four currencies: the US dollar, the euro, the yen and sterling. The central banks of the ‘Big Four’ are all expanding their balance sheets or have been doing so for years with no sign of immediate reversal. They are all trying to convert huge debt problems into inflation problems, and when they succeed their currencies will weaken sharply.

In this currency war, EM central banks risk suffering the most collateral damage. Their reserves – so many of them held in the big four currencies – will be decimated in purchasing power terms. The world will become desperate for alternative currencies to act as replacements for the traditional reserve currencies once their currency debasement efforts really take root.

So far, only one country, China, appears to have spotted the opportunities presented by this situation. Most others merely watch the dollar in fear.

China’s renminbi will become a global reserve currency in the not too distant future. China will benefit enormously from becoming a global reserve currency – not only will its currency become far more stable, but China will also no longer need so many reserves. The excess reserves can then be used for sovereign wealth fund purposes, including the AIIB. Finally, China will be able to increase consumption, because it no longer needs to suppress domestic demand in order to maintain high levels of reserves.

But the world will need more new reserve currencies than just the renminbi. This means that other large EM countries such as Mexico, Brazil, India and others could also benefit from the opportunity that China is now exploiting. With sensible planning and prudent policy implementation, they too can become global reserve currencies.

Technocrats in EM central banks are aware of these issues but face tremendous challenges in convincing their boards of the need to diversify into other currencies. That is why China’s move is so important. The renminbi’s ascent to reserve currency status will demonstrate the huge benefits of diversifying away from the ‘Big Four’ currencies. China will soon have to sell treasuries as its reserves become true ‘excess’ reserves. It is likely to seek to invest the cash in less mainstream currencies. Other EM central banks will ultimately reciprocate by buying renminbi. As each major EM central bank diversifies, not only will it be good for other EM currencies, it will also help all of them to reduce their excess exposures to the ‘Big Four’ QE currencies.

In preparation of the Renminbi becoming a World Reserve Currency the World’s largest dollar volume exchange group has listed Renminbi futures against both the USD and Euro.

10) Offshore Chinese Renminbi Market CME report

Renminbi Versus the USD

11) Chinese Renminbi/USD Futures
12) Chinese Renminbi/USD Quotes

Renminbi Versus the Euro

13) Chinese Renminbi/Euro Futures
14) Chinese Renminbi/Euro quotes

15) Our Structure

Front load = 0.00%
Management fee 0.00%
Incentive fee = 10.00% of net new high profits quarterly

To open a test account enabling you to get comfortable with our team

16) Direct FX opening instructions
17) Clearing and Exchange Members for larger accounts
18) The world’s largest dollar volume exchange group
19) CME videos
20) Due Diligence and how funds are protected
21) Commodity Futures Trading Commission

If you have questions or would like additional information please call
with this page available.

x

Click here for contact details

————————————————————————————————————————————————–

RISK DISCLOSURE STATEMENT

Program availability is dependent on your country of residency; assets, experience and net worth please contact us for details.

My current date/time August 20, 2026 2:41 pm

Peter Knight
Direct 24/7 +1-340-244-4310
Member firms
Schedule an online review

Email: Peter_Knight@PeterKnightAdvisor.com
GoTo VOIP number +1-312-450-0609

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3 Month Deposit Rate, How It’s Set & History

3 month rates or Eurodollar deposits, are time deposits denominated in U.S. dollars at banks outside the United States. (There is no connection with the euro currency or the Eurozone). The term was originally coined for U.S. dollars deposited in European banks, but its expanded over the years to its present definition—a U.S. dollar-denominated deposit in any non US bank for example Tokyo or Beijing would be deemed a Eurodollar deposit.

Below is is 1992-2015 rate, price, contract valuation chart
Rate is in vertical column 1, contract price 2, contract value 3.
Each 0.01 move in this rate equals a $25 change in the contract’s value.
Example, a rate of 0.20% = a contract value of $500, at 0.40% the contract value would increase to $1,000

Click here for charts, quotes and historical data from the Federal Reserve
Click here to enlarge the chart below

To capture the move you need to trade the underlying futures contract

1) Contract information and specifications
2) The Exchange this contract is traded on
3) Contract volume and open interest for all deliveries 2016 to 2026
4) Quotes for all deliveries from 2016 through 2026

To convert the contract price into the rate it represents
Take 100.0000 – the contract price = the rate, for example
100.0000 – a contract price of 99.7500 = a rate of 0.25%
100.0000 – a contract price of 99.5000 = a rate of 0.50%

To convert rate into contract value
Each 0.0100 change in price = $25,
1 full point 1.0000 = $2,500 for example
A rate of 0.25% X $2,500 = $625
A rate of 0.50% X $2,500 = $1,250

Trading this rate higher requires establishing a short position in the underlying futures contract, as the rate rises the futures contract falls in price to reflect the increase in rate/contract value, for example

99.7500 = a rate of 0.25%, contract value of $625
99.5000 = a rate of 0.50%, contract value of $1,250

Click here to enlarge the 1992-2014 monthly rate, price, valuation chart
Click here for a current chart

History of this rate

Gradually, after World War II, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II.

As a result, enormous sums of U.S. dollars were in the custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, granted by certificates. Various history myths exist for the first Eurodollar creation, or booking, but most trace back to Communist governments keeping dollar deposits abroad.

In one version, the first booking traces back to Communist China, which, in 1949, managed to move almost all of its U.S. dollars to the Soviet-owned Banque Commerciale pour l’Europe du Nord in Paris before the United States froze the remaining assets during the Korean War.

In another version, the first booking traces back to the Soviet Union during the Cold War period, especially after the invasion of Hungary in 1956, as the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On 28 February 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed “Eurbank dollars” after the bank’s telex address, they eventually became known as “eurodollars” as such deposits were at first held mostly by European banks and financial institutions. A major role was played by City of London banks, as the Midland Bank, now HSBC, and their offshore holding companies.

In the mid-1950s, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than what could have been earned if the dollars were deposited in the U.S. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U.S. legal interest-rate caps for their use, and were able to do so; thus, Eurodollars began to be used increasingly in global finance.

Eurodollars can have a higher interest rate attached to them because of the fact that they are out of reach from the Federal Reserve. U.S. banks hold an account at the Fed and can, ostensibly, receive unlimited liquidity from the Fed should any trouble arise. These required reserves and Fed backing make U.S. Dollar deposits in U.S. banks inherently less risky, and Eurodollar deposits slightly more risky, which requires a slightly higher interest rate.

By the end of 1970 385,000M eurodollars were booked offshore. These deposits were lent on as US dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the USA and being paid in dollars, thereby avoiding foreign exchange risk on their loans.

Several factors led Eurodollars to overtake certificates of deposit (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:

The successive commercial deficits of the United States
The U.S. Federal Reserve’s ceiling on domestic deposits during the high inflation of the 1970s
Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments

Market size

By December 1985 the Eurocurrency market was estimated by Morgan Guaranty bank to have a net size of 1,668B, of which 75% are likely eurodollars. However, since the markets are not responsible to any government agency its growth is hard to estimate. The Eurodollar market is by a wide margin the largest source of global finance. In 1997, nearly 90% of all international loans were made this way

Futures contracts

The Eurodollar futures contract refers to the financial futures contract based upon these deposits, traded at the Chicago Mercantile Exchange (CME). More specifically, EuroDollar futures contracts are derivatives on the interest rate paid on those deposits. Eurodollars are cash settled futures contract whose price moves in response to the interest rate offered on US Dollar denominated deposits held in European banks. Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future. Each CME Eurodollar futures contract has a notional or “face value” of $1,000,000, though the leverage used in futures allows one contract to be traded with a margin of about one thousand dollars.

CME Eurodollar futures prices are determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. A price of 95.00 implies an interest rate of 100.00 – 95.00, or 5%. The settlement price of a contract is defined to be 100.00 minus the official British Bankers’ Association fixing of 3-month LIBOR on the day the contract is settled.

How the Eurodollar futures contract works

For example, if on a particular day an investor buys a single three-month contract at 95.00 (implied settlement LIBOR of 5.00%):

if at the close of business on that day, the contract price has risen to 95.01 (implying a LIBOR decrease to 4.99%), US$25 will be paid into the investor’s margin account; or
if at the close of business on that day, the contract price has fallen to 94.99 (implying a LIBOR increase to 5.01%), US$25 will be deducted from the investor’s margin account.

On the settlement date, the settlement price is determined by the actual LIBOR fixing for that day rather than a market-determined contract price.

Futures Contract History

The Eurodollar futures contract was launched in 1981, as the first cash-settled futures contract. People reportedly camped out the night before the contract’s open, flooding the pit when the CME opened the doors. That trading pit was the largest pit ever, nearly the size of a football field, and quickly became one of the most active on the trading floor, with over 1500 traders and clerks coming to work every day on what was then known as the CME’s upper trading floor. That floor is no longer, with the CME having moved over to the CBOT’s trading floor and 98% of Eurodollar trading now done electronically.

Eurodollar futures contract as synthetic loan

A single Eurodollar future is similar to a forward rate agreement to borrow or lend US$1,000,000 for three months starting on the contract settlement date. Buying the contract is equivalent to lending money, and selling the contract short is equivalent to borrowing money.

Consider an investor who agreed to lend US$1,000,000 on a particular date for three months at 5.00% per annum (months are calculated on a 30/360 basis). Interest received in 3 months’ time would be US$1,000,000 × 5.00% × 90 / 360 = US$12,500.

If the following day, the investor is able to lend money from the same start date at 5.01%, s/he would be able to earn US$1,000,000 × 5.01% × 90 / 360 = US$12,525 of interest. Since the investor only is earning US$12,500 of interest, s/he has lost US$25 as a result of interest rate moves.
On the other hand, if the following day, the investor is able to lend money from the same start date only at 4.99%, s/he would be able to earn only US$1,000,000 × 4.99% × 90 / 360 = US$12,475 of interest. Since the investor is in fact earning US$12,500 of interest, s/he has gained US$25 as a result of interest rate moves.

This demonstrates the similarity. However, the contract is also different from a loan in several important respects:

In an actual loan, the US$25 per basis point is earned or lost at the end of the three-month loan, not up front. That means that the profit or loss per 0.01% change in interest rate as of the start date of the loan (i.e., its present value) is less than US$25. Moreover, the present value change per 0.01% change in interest rate is higher in low interest rate environments and lower in high interest rate environments. This is to say that an actual loan has convexity. A Eurodollar future pays US$25 per 0.01% change in interest rate no matter what the interest rate environment, which means it does not have convexity. This is one reason that Eurodollar futures are not a perfect proxy for expected interest rates. This difference can be adjusted for by reference to the implied volatility of options on Eurodollar futures.
In an actual loan, the lender takes credit risk to a borrower. In Eurodollar futures, the principal of the loan is never disbursed, so the credit risk is only on the margin account balance. Moreover, even that risk is the risk of the clearinghouse, which is considerably lower than even unsecured single-A credit risk.

Other features of Eurodollar futures

40 quarterly expirations and 4 serial expirations are listed in the Eurodollar contract. This means that on 1 January 2011, the exchange will list 40 quarterly expirations (March, June, September, December for 2011 through 2020), the exchange will also list another four serial (monthly) expirations (January, February, April, May 2011). This extends tradeable contracts over ten years, which provides an excellent picture of the shape of the yield curve. The front month contracts are among the most liquid futures contracts in the world, with liquidity decreasing for the further out contracts. Total open interest for all contracts is typically over 10 million.

The CME Eurodollar futures contract is used to hedge interest rate swaps. There is an arbitrage relationship between the interest rate swap market, the forward rate agreement market and the Eurodollar contract. CME Eurodollar futures can be traded by implementing a spread strategy among multiple contracts to take advantage of movements in the forward curve for future pricing of interest rates.

In United States banking, Eurodollars are a popular option for what are known as “sweeps“. Until July 21, 2011, banks were not allowed to pay interest on corporate checking accounts. To accommodate larger businesses, banks may automatically transfer, or sweep, funds from a corporation’s checking account into an overnight investment option to effectively earn interest on those funds. Banks usually allow these funds to be swept either into money market mutual funds, or alternately they may be used for bank funding by transferring to an offshore branch of a bank.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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What the Fed Funds rate is and how it’s set

In the United States, the federal funds rate is the interest rate at which institutions actively trade balances held at the Federal Reserve.

Click here to enlarge the chart below
Click here for a current chart and historical data

How Fed Funds Trade

Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The interest rate that the borrowing bank pays is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

Click here for the names of the individuals that determine rates.
Click here for the 12 regional Federal Reserve Banks and their presidents.
Click here for the F.O.M.C. meeting and post meeting press conference schedule.
Click here Bloomberg interactive Fed Funds rate chart.
Click here for the 1954-2013 Fed Funds rate chart and historical price data from the Federal Reserve

The Federal Reserve uses open market operations to influence the supply of money in the U.S. economy to make the federal funds effective rate follow the federal funds target rate.

U.S. banks and thrift institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirements are 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution are carried a 10 percent reserve requirement.

For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank is negotiated between the two banks and the weighted average of this rate across all such transactions is the federal funds effective rate.

The nominal rate is a target set by the governors of the Federal Reserve which they enforce primarily by open market operations. That nominal rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual Fed funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.

Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.

The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.

Applications

Interbank borrowing is essentially a way for banks to quickly raise liquidity. For example, a bank may want to finance a major industrial effort but not have the time to wait for deposits or interest (on loan payments) to come in. In such cases the bank will quickly raise this amount from other banks at an interest rate equal to or higher than the Federal funds rate.

Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely^.Thus this interest rate acts as a regulatory tool to control how freely the US economy operates.

By setting a higher discount rate the Federal Bank discourages banks from requisitioning funds from the Federal Bank, yet positions itself as a lender of last resort.

Comparison with LIBOR

Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as follows:

The target federal funds rate is a target interest rate that is set by the FOMC for implementing U.S. monetary policies.
The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies’ securities).
LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions.
LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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