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March 2020: DXY Versus Fed Fund Rates

Published 03/19/2020, 08:50 AM
Updated 09/03/2023, 03:41 AM
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What explains the wild ride meltdown and melt up for DXY and USD cross pairs EUR/AUD and EUR/NZD for example, is Fed Funds lacks a correlation to DXY and is negative overall.

When the Fed dropped interest rates, Powell offered the green light for a massive USD rise. And the massive USD rise, in turn, explains why the non-USD pairs, GBP/USD, AUD for example, radically dropped. And nonstop.

The problem with the DXY Vs Fed Fund's relationship is Fed Funds are miles too low and deeply oversold. Fed funds are at 0.25, but should trade easily at 0.35 and 0.67 and that’s just the start to retain a fairly normalized range.

But to achieve those levels, Fed Funds must rise by 50 basis points and this is not likely anytime soon especially from the position of Donald Trump.

Traditionally interest rate arrangements among nations have been set up as follows: Fed Funds weres always highest and nation’s priced interest rate below Fed Funds effective rates.

Along comes Trump to now change the 50 year system since the free float in 1972 to price Fed Funds below many nations. This is a radical departure from 50 year norms and more radical considering the USD’s role to other nations.

To head higher, the Fed Funds must break 1.15 to target 1.39 and this is not likely anytime soon. The Fed Funds could easily live lower for a long time to come.

The RBNZ, the smartest central bank, and guardian of interest rates in Asia, correctly priced its interest rates at 0.25 to match the Fed Funds Rate.

DXY at 101.00’s is miles too high and massively overbought. Next targets lower are located at 99.82, 99.51, 99.16, 98.74 and 98.39.

DXY’s big break line is located at 98.11, a break targets many massive brick walls at 96.00’s starting at 96.75, 96.36 and 96.18.

The most extreme price to DXY is 102.33 and another 100 pips higher.

DXY above the 5 year average at 96.36 now sits correctly with its counterpart gold. The yellow metal trades above its 5-year average at 1262.19.

WTI is below its 5-year average at 53.52 and the S&P 500 is below 2505.

The S&P’s reversal below its 5 year average allowed the VIX to position itself correctly alongside its trade counterparts, gold and DXY, all nonrisk assets.

Risk assets WTI and the S&P’s are now correctly positioned against nonrisk Gold, DXY and VIX. Overall, the United States system is correctly positioned except for a massively oversold Fed Funds.

Brian Twomey

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