The dollar fell on expectations that interest rates would subsequently remain unchanged in spite of ongoing tightening cycles by other major central banks. More recently the dollar has fallen on speculation that the Fed will continue to cut interest rates following its whopping 50bp cut. This makes any shift in sentiment critical to the future for the dollar.

Thanks for the explaination. I'm used to only looking at one side of the equation/ocean. Currencies are obviously more complicated than trading bonds.

ffr repo "stop out" / target

10/10 4.75
10/9 4.91 4.72
10/5 4.77
10/4 4.74 4.63
10/3 4.68 4.76
10/2 4.78
10/1 4.92
9/28 4.58
9/27 4.93 4.25
9/26 4.88 *
9/25 4.82 4.63
9/24 4.74 4.63
9/21 4.76 4.62
9/20 4.77 4.45
9/19 4.74 4.67
9/18 4.92 4.97 4.75
9/17 5.33 5.18 5.25
9/14 5.25 5.04
9/13 5.09 4.70
9/12 5.18 4.87 *
9/11 5.06 4.90
9/10 5.07 4.95
9/07 4.86 5.05
9/06 4.98 5.05
9/05 5.18 5.22
9/04 5.22 5.20
9/03 holiday
8/31 4.96 .10
8/30 5.00 4.85
8/29 5.00 5.35 *
8/28 5.30
8/27 5.27 5.05
8/24 5.11
8/23 4.88 3.00
8/22 4.87
8/21 4.89
8/20 5.03 4.33
8/17 4.91
8/16 4.97 4.80
8/15 4.71*
8/14 4.54
8/13 4.81 5.11
8/10 4.68
8/09 5.41 5.15
8/08 5.27 5.18
8/07 5.26 5.17
8/06 5.26 5.17
8/03 5.24 5.17
8/02 5.24 5.14
8/01..5.30 5.13 *
7/31 5.28 5.14
7/30 5.29 5.17
7/27 5.25 5.19
7/26 5.28 5.16
7/25 5.32 5.14
7/24 5.25 5.15
7/23 5.26 5.15
7/20 5.25 5.14
7/19 5.25 5.12

The repurchase agreement rate (repo), or "stop-out" (lowest bid accepted for Treasury securities). This is the "true policy instrument".

The federal funds rate was below the target rate on 22 days before the Sept. 18th, 1/2 percentage point cut. Oct. 31st looks like a no-go.

Yep. It's starting to shape up that way. Though the Fed is unlikely to take a neutral-to-hawkish stance on rates anytime soon, a modest improvement in economic data and credit market conditions suggest that a rate cut on October 31 is a no-go. Fed Funds Futures markets have begun to price in such a likelihood, with current implied expectations at just a ~30 percent chance of such an event. This is significantly lower than the ~50 percent probability priced in last week, and signals a shift in overall market beliefs.

All else remaining equal, this should boost the US dollar. Though as yesterday's price action shows, it seems as though markets are going to believe what they want to believe.

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Yeah, markets are hitting the pipe lately.

What will be more important is the statement after the meeting. A hold on rates will be a given (to everyone except 95% of the self-misled market at the moment) but if we get a statement indicating that cuts are probably not needed further, then the fun will begin. If there will be anything at all that indicates even a snowball's chance in hell of a rate cut in the future, the market will seize on that and run off chanting "Ben! Ben! Ben!"

Oh, Ben Bernanke can already walk into any watering hole in the financial district and he won't have to pay a cent for a drink.

Speculators are clearly pleased (stock market bulls, at least) with the Fed's recent actions, but I think you're right in saying that they could be in for a rude awakening after the October 31 FOMC decision.

Upcoming retail sales data may clarify expectations a bit, but it's interesting to note that Fed Funds Futures have actually gained on the day.

The implied yield on the FFF contract for November fell 2.5 bp to 4.63 percent. Some quick math will show that this amounts to a 40% probability for a cut to 4.50 percent--up from 36% yesterday.

Yeah, they gained because the market took a nose dive and the market believes (unfortunately correctly) that any such nose dive will be supported by Uncle Ben.

David,

Can you update FFF outlook? I'm thinking it dropped somewhat, and looking for the actuals. Thanks, mate.

Sure.

Eyeballing it, the December contract is down 2.5 points on the day, leaving it at 95.38 and the implied yield at 4.62--hardly a ringing endorsement for a cut to 4.50 by the end of the year.

And, the obligatory Bloomberg FFIP screen:

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Thanks

Now I just have to understand why the market is not pricing this in. Stocks, currencies or otherwise.

Yep. It's like we've been discussing recently. Markets seem willing to believe what they want to believe. I'm honestly at a bit of a loss when it comes to this dynamic, but to abuse (and probably butcher) a cliché, "Markets can stay irrational far longer than you can stay solvent."

No sense in fighting the current trend. Should be interesting to watch market behavior around the upcoming FOMC decision on October 31.

I've only been trading for about 5 or 6 years now, but what I do remember, is that - every time there's an irrational move of this magnitude - there is always a catalyst that seemingly sets off the reversal. When this occurs, it is usually quite severe a correction. The trick, of course, is finding the catalyst.

The most obvious choice would be the coming FOMC meeting if we're strictly referring to markets' collective indifference to the likelihood of stable rates.

If we're speaking more generally and referring to extended USD and JPY losses versus other currencies, then the coming weekend's G7 meeting could certainly prove interesting.

I think for a move of the magnitude that Ivanovich speaks of, the catalyst will not come from the G7. The whole idea of a 'black swan' event is that it is rare and almost completely unforeseeable. There are too many eyes on this particular event, though I do believe we could see some volatility upon commentary that relates to specific currencies (namely USD or JPY).

That's all well and good, but I think we're all better at predicting volatility surrounding certain events than we are predicting Black Swans.