A Change in Interest Rate Expectations

In the last issue of Seasonal Insights I discussed the typical pattern of stock prices when the Federal Reserve cuts interest rates.  As one would expect, the stock market tends to stabilize after cuts in the federal funds rate.

The issue is topical, as many investors and analysts expect rate cuts to be implemented soon given that signs of an economic slowdown are beginning to proliferate.

 

Market expectations about the direction of administered interest rates have changed significantly since last November. [PT]

 

Today I want to examine a market that reacts differently to rate cuts than one would perhaps expect: the foreign exchange market.

 

What is the Effect of Fed Actions on Exchange Rates?

The chart below shows the average pattern of the US dollar index (DXY) in the 140 days before and after cuts in the federal funds rate. The pattern was calculated as an average of the past 30 years, which included altogether 46 rate cuts. The horizontal axis shows the number of days before and after the event, the vertical axis shows the average moves of the dollar index in percentage points. The day of the rate cut is highlighted in orange in the middle of the chart.

 

Pattern of the US Dollar Index in the 140 days before and after US rate cuts, average of 30 years (46 events, 1989 – 2019). Rate cuts mark the timing of trend reversals in the dollar with pinpoint precision!

 

As can be seen right away, on average the US dollar declined in the months leading up to rate cuts. However, the trend typically reversed precisely on the day the rate cut was implemented. As the chart illustrates, thereafter the dollar tended to appreciate for several months.

 

Why do Exchange Rates Behave so Strangely?

Perhaps you expected that the dollar would decline in concert with the federal funds rate – after all, investment in US dollar-denominated fixed-rate instruments becomes less attractive. In reality the US dollar typically strengthens after a rate cut.

Let me take this opportunity to give you the reason for the dollar’s odd behavior favored by myself. Rate cuts are relatively easy to predict. Many investors will therefore already be positioned accordingly and will tend to close out their positions once rate cuts are actually implemented –  “sell the rumor, buy the news”, as the saying on Wall Street goes.

 

Take advantage of the Fed’s predictability…

There are certainly other possible explanations. For example, rate cuts are often associated with crisis scenarios. In crisis conditions demand for US dollars often increases, either due to the need to repay USD-denominated debt, or because the dollar is considered a “safe haven” currency. Economic considerations may play a role as well.

Contrary to the explanation I prefer, namely that this behavior represents a typical “sell the rumor, buy the news” situation, these approaches cannot explain why the trend changes coincide precisely with rate cuts. The reasons cited above nevertheless may play a role as additional drivers.

 

…by making use of empirical studies!

It is therefore possible to take advantage of the Fed’s predictability in the context of a contrarian investment approach. However, rate cuts only happen occasionally. As an investor, one requires more input.

Fortunately a great many more events and cyclical drivers affecting market trends exist. You can easily find out about them for yourself with the help of the web-based Seasonax app at www.app.seasonax.com or alternatively with the Seasonax app on Bloomberg or Thomson Reuters. That way you will without a doubt gain further surprising and useful insights!

PS: by making use of empirical studies you will rely on facts rather than preconceived notions!

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com , which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange. You can find an introduction to the Seasonax app and in-depth information on what it can do here. Furthermore, here is a complementary page on the web-based Seasonax app, which costs less and offers slightly different functionality (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app. Details are available on request – simply send a note to info@acting-man.com with the header Seasonax!).

 

Charts by: BarChart, Seasonax

 

Chart captions by PT

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold, the Safe Haven - Precious Metals Supply and Demand
      Investments vs. Money Last week the price of gold went up another $11, but the price of silver dropped 4 cents. The gold-silver ratio hit another new high, up another point, though down from Tuesday’s high water mark. This obviously was not the week that wage-earners increased their money holdings or that institutions expressed a preference for the bargain of silver.   Prosperity is just around the corner... and so is the trade deal. [PT]   This coming week...
  • Independence Day in America Circa 2019
      Freedom and Apple Pie The days are long and hot in the Northern Hemisphere when real American patriots raise the stars and stripes. Today the free and brave, with duty and self-sacrifice, begrudgingly accept federal holiday pay to stand tall upon their own two feet. Rugged individualism and uncompromising independence are essential to their character.   Independence day festivities...   With purpose and intent, they assemble as merry mobs along the shoreline to...
  • The Calm Before the Storm
      Intra-Market Divergences Galore  US big cap stocks have rallied to new highs in recent months, but just as in the rally from the low of the February 2018 mini-panic to the September/October 2018 peak, sizable divergences between different indexes have emerged in the process. New highs in the big cap indexes (DJIA, SPX, NDX) are once again not confirmed by small caps (RUT), the broad market (NYA) and a number of sub-sectors (such as the DJTA which is included in the chart below;...
  • The Strange Behavior of the US Dollar in the Wake of Fed Rate Cuts
      A Change in Interest Rate Expectations In the last issue of Seasonal Insights I discussed the typical pattern of stock prices when the Federal Reserve cuts interest rates.  As one would expect, the stock market tends to stabilize after cuts in the federal funds rate. The issue is topical, as many investors and analysts expect rate cuts to be implemented soon given that signs of an economic slowdown are beginning to proliferate.   Market expectations about the direction of...
  • The Four Dimensions of the Fake Money Order
      A Good Story with Minor Imperfections “If you don’t know where you are going, any road will get you there,” is a quote that’s oft misattributed to Lewis Carrol. The fact that there is ambiguity about who is behind this quote on ambiguity seems fitting. For our purposes today, the spirit of the quote is what we are after. We think it may help elucidate the strange and confusing world of fake money in which we all travel.   Consumer price index, y/y rate of change...
  • Wall of Worry M.I.A. -  Precious Metals Supply and Demand
      Too Much Excitement? The prices of the metals fell last week, with that of gold -$9 and silver -$0.32. Of course, it was a week of stock market exuberance. Why would anyone want to own money, or seek safety when the Fed can seemingly push interest down / assets up indefinitely? As the old TV ad for Lotto proclaimed “you gotta be in it, to win it!”   “Stablecoin” Tether is used as a dollar stand-in on cryptocurrency exchanges that offer no fiat currency pairs. There has...
  • Resistance Created by Long-Suffering “Hodlers” - Precious Metals Supply and Demand
      Gold vs Other Assets The prices of the metals went up +$15 and +$0.23. We will be brief this week, as Keith just got off a 17-hour flight from Perth to London. Stocks continue their march upwards. And hence the gold price seems stalled—or is it? It may seem like gold goes up, when stocks go down and vice versa. That’s been the recent pattern. Why should people own money without return, when stocks are where the action is?   Gold-SPX ratio: in long-term gold bull markets,...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!