FX Traders' Basic Course for “Adult Economics” — Final Episode: How to Predict Foreign Exchange Rates from Interest Rate Trends ~ Thorough Use of CME FedWatch [Kouichirou Amayo]
This企画 allows you to systematically learn fundamentals (analysis). Now, as the culmination, we delve into a method to forecast the foreign exchange market by utilizing US interest rate trends. Based on the interest rate levels as of November 21, 2017, we will explain techniques to build market intuition.
Final Episode Table of Contents
1. It is important to grasp market interest rate expectations
2. What is a dot plot chart?
3. Comparison of FF rate futures and dot plot charts
4. CME-provided convenient tool “FedWatch Tool” has evolved further
5. Are central bank events opportunities or risks?
6. Summary of Episode 9
※This article is a republication/editing of an article from FX攻略.com February 2018 issue
Keiichiro Amaya (Amaya Kouichiro) Profile
With over 20 years in senior foreign exchange positions at major Western banks such as UBS, JPMorgan, and BNP Paribas, he has ranked high in Tokyo FX market popular dealer rankings by the financial trade magazine “Euro Money.” In 2006, he became a freelance financial analyst and now provides FX market insights to FX companies and portal sites from his sharp, independent perspective.
twitter：https://twitter.com/geh02066
It is important to grasp market interest rate expectations
In 2017, starting with the inauguration of the Trump administration, various factors such as North Korea concerns, Japan’s lower house dissolution, and U.S. hurricane damage emerged, but ultimately the market’s main concern remained the trajectory of U.S. monetary policy.
If the U.S. Federal Reserve (FRB) raises rates more than the market expects, the dollar will rise; if the pace and magnitude of rate hikes lag behind market expectations, the dollar will fall. Therefore, by understanding when and how much the market expects rate hikes and predicting whether actual hiking pace will exceed or lag behind market expectations, you can construct a solid market view—the big picture.
• U.S. rate hike pace > market expectations ⇒ dollar rises
• U.S. rate hike pace > market expectations ⇒ dollar falls
Market expectations for rates and their changes can be inferred from the FF rate futures traded on the Chicago Mercantile Exchange (CME). FF rate futures are priced as a value subtracted from 100, representing the expected rate level. For example, if December 2018 FF rate futures trade at 98.275, the implied rate is 100 − 98.275 = 1.725%. In other words, the market expects the FF rate at year-end to be 1.725%.
FF rate futures have maturities up to about three years ahead, and CME’s website provides near real-time pricing. Figure ① is a table of FF rate futures as of November 20, 2017. The leftmost column “Month” indicates the maturity.
