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Currency and Central Bank Rate Adjustment Correlation Study?


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Currency and Central Bank Rate Adjustment Correlation Study?

  #1 (permalink)
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Currency and Central Bank Rate Adjustment Correlation Study?

Does anyone know if there are any studies or articles regarding how central banks react to rate cuts of other central banks and the currency moves that follow? All easy info to get, but if anyone has a good source it could save me some leg work.

If not, I'll start working on it in excel. I'm particularly interested in seeing how the ECB and BAC have behaved in the past to US cuts. With the US being the most hawkish at the moment (lol) it would seem the other guys have less room to cut.

Thinking a sustained EUR rally might be around the corner if the Fed acts as predictably as they usually do.


Last edited by LittleFinger; June 10th, 2019 at 08:54 PM.
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  #3 (permalink)
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LittleFinger View Post
With the US being the most hawkish at the moment (lol) it would seem the other guys have less room to cut.

Thinking a sustained EUR rally might be around the corner if the Fed acts as predictably as they usually do.

If you think the US is more hawkish, wouldn't the USD rally instead of the euro? (maybe it was sarcasm)

Anyway, it all depends on many factors. If a recession is coming and the Fed cuts rates, depending on the deflationary impact of the recession and the number of cut rates the USD could still rally even though rates were cut.

You might want to look at eurodollar futures instead.

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  #4 (permalink)
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Kinda strange that US Treasuries, which I believe are considered the safest credit risk, yield 2% but European Bonds are flat/negative!

Regarding Eurodollars spot is 97.55 while March is the peak of the curve at 98.13. Implies they expect Fed Funds to drop 60 basis points in the next 9 months!

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  #5 (permalink)
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SMCJB View Post
Kinda strange that US Treasuries, which I believe are considered the safest credit risk, yield 2% but European Bonds are flat/negative!

I think it's just the effect of the FED having interest rates at 2.39% and the ECB at 0%.

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  #6 (permalink)
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Agreed but if you ignore currency effects wouldn't everybody prefer to own a US 2% rather than an ECB 0%?

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  #7 (permalink)
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For an individual yes, but I don't think people have a choice as a whole due to arbitrage.

If the ECB targets 0%, that will become the interbank lending rate. If german bonds were at 2%, they could profit a "risk free" 2% by borrowing at the interbank rate and buying bonds. Eventually the spread will narrow and german bonds will go to 0% (maybe a bit less due to the cost of holding physical money).

If the FED targets 2% and US bonds were 0% because everyone is investing there, the US treasury could sell more bonds and lend at the interbank rate, earning a "risk free" 2% (the FED would have to borrow all this money to keep interest rates on target). This would increase the yield of US bonds to 2% or a bit less like before (if it didn't, they could just keep doing that until they no longer have a debt problem!).

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