Fed: Data Shows Mkt Pricing in Q2 Rate Hike?

It has been a while since I provided updated numbers for the market’s rate hike expectations and I will chalk it up to my travels! Rate expectations are always changing and a lot has happened over the past month. Its always important to keep track of them because they reflect what investors are pricing in!

Here are the latest numbers and highlights (compared to March)

Fed – One 25bp rate hike expected by Q2 2012 > Compared to Q1 rate hike before
BoE – First Rate hike expected in Jan > compared to prior forecast for 50bp rate hike in 2011
ECB – 50bp of additional tightening expected > compared to 75bp after April hike
RBA – Close to one 25bp rate hike by years end > significant upgrade from March expectations
RBNZ – One rate hike in Jan 2012 > bumped up from March
BoC – 25bp rate hike in Oct > slight downgrade in rate hike expectations

Bernanke’s Plan Z

U.S. equities turned positive, erasing triple digit losses in the second half of the NY trading session. The improvement in risk appetite also extended to currencies as safe haven flows eased out of the U.S. dollar. The British pound, Swiss Franc and commodity currencies benefited from the weakness in the greenback. The Japanese Yen moved lower which is natural when risk has improved but the sell-off in the euro reflects the difficulty of finding buyers ahead of the EU Stress Test results and particularly after most short euro positions have been shaken out of the markets. No U.S. or European economic is scheduled for release tomorrow which leaves the market’s focus on Bernanke’s testimony on the monetary policy and the economy. Although the Fed Chairman will face extensive grilling by the members of the Senate Banking Panel, currency traders only want Bernanke to answer 3 questions:

3 Questions for Bernanke

1. Has the U.S. economy improved or deteriorated over the past few months?
2. Is the outlook for growth balanced, skewed to the downside or upside?
3. What is Plan Z?

Has the U.S. economy improved or deteriorated over the past few months?

Twice a year Bernanke heads to Capitol Hill to deliver a testimony on the nation’s monetary policy to the Senate Banking and the House Financial Service Committees. The last time he delivered what was once known as the Humphrey Hawkins testimony was in February. Back then he was relatively downbeat about the economy even though he acknowledged that rates will have to be raised at some point (which he will probably mention again). The Fed’s biggest concern was the labor market and how growth will slow once the stimulus starts to fade. Fast forward to July and his prognosis seems to have come true with the housing market feeling the pain of stimulus programs expiring and the labor market relying too heavily on government programs. Continue reading

Updated! Salaries of Central Bank Governors

The job of turning around the global economy lies of the shoulders of just a few people and in this group includes central bank governors. With such a tall task at hand, it leads me to wonder what are the people with such power and responsibility making. Is it enough to compensate for the sleepless nights, grey hairs and anxiety?

Here’s the latest data that I could find on central bank salaries. Some of these are exact numbers from annual reports, some are estimates based upon ranges and publicly available estimates.

**I added SNB President Roth who made a whopping $725,468 last year

Ben Bernanke (U.S.): $191,300 (in 2008)

Jean-Claude Trichet (EUR): $446,806 (EUR 351,816 in 2008)

Mervyn King (U.K.): $435,000 (GBP 290,000 in 2008)

Masaaki Shirakwa (JPY): $370,000 (in 2007)

Jean-Pierre Roth (CHF): $725,498 (CHF 817,700 in 2008)

Mark Carney (CAD): $350,000 max (in 2008)

Glenn Stevens (AUD): $160,000 (AUD 200,000 in 2008)

Alan Bollard (NZD): $378,000 (NZD 540,000 in 2007)

Who is the highest paid central banker in the world?

Joseph Yam (HK) $1.32 million (HK$10.33M in 2007)

Do you think these central bankers should be paid more or less? Chime in!

EUR/USD Could Extend to 1.40

The EUR/USD is on a tear, having rallied more than 600 pips or 5 percent over the past 24 hours. The significance of Fed’s actions continue to resonate over the currency markets and even though we have already seen parabolic moves in the pair, I think it will head higher.


On December 16th, when the Fed first brought up the prospect of buying U.S. Treasuries at their FOMC meeting, the EUR/USD rose from a low of 1.3629 to a high of 1.4719, an 8 percent move. Now that the Fed is actually following through with buying longer term Treasuries, the impact on the EUR/USD should be the same if not greater.

We have seen a similar reaction in the British pound. After officially announcing Quantitative Easing, the GBP/USD fell 650 pips, a move of only 4.5 percent. However the price action of the GBP/USD has been diluted by the weakness of the greenback and so a more accurate reflection of the market’s appetite for British pounds post Quantitative Easing can be found in EUR/GBP which has rallied 8 percent since the March 5th Bank of England meeting.

Source: eSignal

Source: eSignal

Therefore an 8 percent move in the EUR/USD post FOMC would take the currency pair to at least 1.40 from Wednesday’s low, which is my target over the next few trading days.

Source: eSignal

Source: eSignal

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How Does the Fed “Print Money?”

With the Fed’s announcement today, many people may be wondering “How does the Fed print money?” Here is a snippet from my Daily Piece on Currencies.

Most of the time when we say that a central bank “prints money” that does not mean that they actually fire up the electronic version of a printing press. They can and this is the way Bernanke described it in 2002 when he said that “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

However more often printing money means that the Federal Reserve will hold an auction to buy assets like bonds or mortgage backed securities from banks. Then they issue a credit to the bank’s account, creating new money and the hope is that the bank will use the money to lend to businesses and consumers.

Unfortunately by increasing the supply of dollars, each dollar is worth less. The U.S. government also increases its debt burden, raising concerns for foreign investors. This is compounded by the fact that the Fed’s purchases of Treasuries will drive down bond yields, reducing the attractive of dollar denominated investments.

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