FX Next Week and Yield Curve Inversions

By Brian TwomeyForex57 minutes ago (Nov 24, 2022 09:48AM ET)

Since the Fed’s last raise on Nov. 3, the Fed Funds rate has opened and closes at 3.83. The Fed Funds rate once traded freely, with highs and lows as any financial instrument. In 2000, Central banks implemented meetings every six weeks. Before 2000, central banks met anytime they desired and changed interest rates at their discretion.

Traders were forced to factor Fed Funds for oversold and overbought status for possible changes to an unknown meeting date. Fed Funds then was known as the discount rate, which is discounted to headline. The question was the spread and insight into possible interest changes.

Bernanke and Yellen changed Fed Funds into an immovably fixed rate. Fed Funds moves every 12 points with every 25-point change to the headline and remains fixed.

From 3.83, Fed Funds trades daily at a maximum of 25 points and a minimum of 12 from 3.80 to 4.05. Yields are priced from Fed Funds and usually trade at much higher rates.

Past yield curve inversions occur mainly when higher yields trade below lower yields, especially the 10-2 Year Treasury Yield Spread rates. How severe an inversion is must be measured by the United States 10-Year to 3-month to determine Fed Funds location about 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 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 is 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 apply as the criteria pertain to a systemic condition that no longer exists.

The Week Ahead

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 at 0.6500s and 0.6600s, AUD/EUR also traded in lockstep to AUD/USD at 0.6500s and 0.6600s. This marriage left EUR/AUD paralyzed to movements over months.

AUD/EUR now trades at 0.6480 or EUR/AUD 1.5413 and AUD/USD at 0.6700s. AUD/USD lower must break 0.6673, 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 broader 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 from total range movements and reduced profits.

Overbought EUR, GBP, and NZD/USD are the direct result of US Dollar Index. Last week big lines above were located at 107.81 and 108.34, and DXY traded at 108.01. DXY above averages now exists at 106.81, 108.27 and 108.42, and 109.29. DXY averages above are dropping slowly as the week progresses.

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 massive lines at 1.3400s and 1.3500’s on a short-only strategy. USD/CAD’s first major line is located at 1.3329. USD/CAD averages above are dropping slowly every week, along with DXY.

USD/JPY last week 139.44 to 140.29 or 141.15 and 142.01. Highs traded at 142.24 and lows at 138.02 on the break at 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 three 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.

FX Next Week and Yield Curve Inversions

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