I'm in disbelief about USD

[clockwork71]

It makes sense to be long because of a what, 1 to 2% difference in interest rates (I seriously don't know the numbers, but I'd bet its somewhere around there), when the U.S. is printing dollars at a 23%+ clip annually, with no end in sight? I think that has to easily engulf those slight difference in interest rates, at least for the currencies where their countries are not engaging in the same crazy level of printing...

Most of the US dollars that are printed actually go overseas. Hence the eurodollar market

 

[misterkel]

So I bought bullish positions in USD about 2 weeks ago after a strong jobs report and rising bond rates. After the Fed meeting yesterday, USD tanked and I thought I would have another margin call. Here we are just 16 hours after the Fed announcement... And USD has returned to previous levels. It absorbed the entire shock in just 16 hours!!! This is very good for a long-term USD bull position, I think!!

It's on a longish term downtrend (against the CAD, at least) and it broke through support about a month back. I'm not betting the farm, but, hey, not a forex guy anyway.

 

[Saltynuts]

So an important thing to understand is that central banks don’t set rates “across the curve” — they set the overnight rate. Some central banks engage in yield curve control where they hint at what level of rates they think make sense, but the Federal Reserve doesn’t do this.

So while the Fed and other central banks control the short term rate, the long term rate (10yr) will drive the bulk of fund flows and set the direction on the currency. That’s not to say that tactical trading around changes in short term rates don’t make sense.

How does this feed into inflation?
Interest rates are comprised of various sub factors. They include the real rate of interest (time value of money theoretically), expected inflation, term premia, and credit risk.

If you look at a current 1yr bond and a 10yr bond, the yields on these might be (hypothetically speaking) 1% and 1.7%. Those nominal rates are expressing a view on the aforementioned factors. So if you think inflation is going to get out of control, you would expect US rates to rise. If you think the inflation will go wild in a few years, then you should expect the spread between the 1yr and 10yr to widen.

This is how market participants express their view of inflation. This then drives the value of a currency.

Example:
You have 100k usd and want to invest it in something safe for 2 years. You compare bonds and find that the US is paying 14 basis points on a 2yr while a German bond is paying -69 basis points with the same duration. What do you buy? If you a German or Chinese company with a lot of USD (from trade), do you convert the currency into your own or would you rather hold 2 year treasuries? What does this do to demand for USD vs other peers? Etc.

Thanks longandshort. Do does the Fed only buy 1 year treasuries, and not other longer term treasuries like the 10 year or 30 year?

 

[Saltynuts]

Most of the US dollars that are printed actually go overseas. Hence the eurodollar market

All that is well and good, but I don't think that matters. The prior numbers are what they are. The question is can the numbers of new dollars being supplied across the board, now increasing at a 23%+ annual rate, somehow be "absorbed" without causing inflation. I don't see how. If dollars were previously being increased at a [10%] annual rate, and now they are being increased at a 23% annual rate or more, how does the demand for eurodollar suddenly ratchet up from whatever it was before to soak up the HUGE annual increase in dollars? Why was that demand not there before?

 

[Snarkhund]

Getting long USD while the printers go Brrrr. Yeah No.

 

[longandshort]

Thanks longandshort. Do does the Fed only buy 1 year treasuries, and not other longer term treasuries like the 10 year or 30 year?

It buys across treasuries, but it influences the short end the most. It also buys agency MBS’s. Anyway, I probably would spend more time understanding the drivers of currencies, rates, and central banks before I put a short dollar position on the book.

 

[farmerjohn1324]

It buys across treasuries, but it influences the short end the most. It also buys agency MBS’s. Anyway, I probably would spend more time understanding the drivers of currencies, rates, and central banks before I put a short dollar position on the book.

The drivers of central banks is easy. They desire full employment and target 2% inflation rate. They're like a broken record telling you this. Other central banks may have slightly different variables, but the idea is the same... Assuming it's an honest institution in that country.

If you want to understand what drives currency prices, read "The Alchemy of Finance" by George Soros. He breaks it down to 8 variables I believe. I don't have the book with me to double-check. I should definitely re-read that part.

 

[clockwork71]

All that is well and good, but I don't think that matters. The prior numbers are what they are. The question is can the numbers of new dollars being supplied across the board, now increasing at a 23%+ annual rate, somehow be "absorbed" without causing inflation. I don't see how. If dollars were previously being increased at a [10%] annual rate, and now they are being increased at a 23% annual rate or more, how does the demand for eurodollar suddenly ratchet up from whatever it was before to soak up the HUGE annual increase in dollars? Why was that demand not there before?

All those traders looking to buy oil. Its the gamble, yo.

 

[longandshort]

@farmerjohn1324

 

[farmerjohn1324]

@farmerjohn1324

Nice!