Interbank Market News Scan: Is one and done is out of the window according to CME Fed Watch?

The stats …

30-Day Federal Funds Futures and Options (ZQV3): 94.735

Effective Federal Funds Rate: 5.08%

Discount Window Rate: 5.25%

Interest on Reserve Balances: 5.15%

10-Year Treasury Note: 3.80%

EUR/USD=1.0713

USD/JPY=140.5300

DXY=104.07

The takeaway … The dollar strengthens and I see less demand for the euro and the yen.

According to data from the Federal Reserve System, the central bank’s holding of euros fell 1.7% from $11,939 million in March 2022 to $11,733 million in March 2023. Euros held as part of the U.S. Treasury’s emergency stabilization fund fell by almost the same percentage, 1.6%. Treasury in March 2022 held $11,920 million worth of euros, but the amount held fell to a value of $11,733 million in March 2023.

Yen holdings fared no better whether held for central bank or Treasury operations. Both the Federal Reserve and the US Treasury held equal amounts of yen between March 2022 and March 2023. In March 2022, the Federal Reserve and US Treasury both held $7,697 million worth of yen. That amount fell 8.5% to $7,040 million worth of yen by March 2023 for both the Federal Reserve and the US Treasury.

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According to data from OANDA, the EUR/USD exchange rate fell 1.9% from 1.11358 at the end of March 2022 to 1.09256 at the end of March 2023. This may indicate a declining demand for the euro in term of the dollar, but I would like to explore other factors that impact the demand for the euro before making a definitive conclusion or taking a bet.

Data from OANDA informed me that the exchange rate for USD/JPY increased 8.2% between March 2022 to March 2023. The exchange rate climbed from 123.119 to 133.258 over the period.

The Federal Reserve System’s increase in its discount window and interest on reserve balances rates could be the culprit in the increases in the cost of the dollar and will be one of my factors in determining my next trade.

In addition, 61.3% of respondents in the CME FedWatch index believe the Federal Reserve will not raise the discount window and interest on reserve balance rates in two weeks at the June Federal Open Market Committee meeting. The 30-Day Federal Funds Futures and Options quote is giving some tease that the market expects the bottom of the target range to exceed 5.25% after the June meeting.

What do you think? Will the USD/JPY and the EUR/USD continue on their trends? What other factors are affecting the probabilities of a price movement no matter the direction?

Disclaimer: The data and output from this blog post does not constitute investment or legal advice and is not a personal recommendation from Alton Drew.  Nothing contained herein constitutes the solicitation of the purchase or sale of any futures or options.  Any investment activities undertaken will be at the sole risk of the reader.  Alton Drew expressly disclaims all liability for the use or interpretation (whether by visitor or by others) of information contained herein. Decisions based on this information are the sole responsibility of the reader.  Any visitor to this page agrees to hold Alton Drew harmless against any claims for damages arising from any decisions that the visitor makes based on such information.

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Alton Drew

31 May 2023

Disclaimer: The above analysis should not be taken as legal or financial advice. Please consult your attorney or financial advisor before making a trade.