Fed Currency Swaps Look Good for the USD | Forex Fundamental Analysis

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Fed Currency Swaps Look Good for the USD

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by John Jagerson

The Fed told the world on Feb 3rd, 2009 that they would be extending the currency swap facilities and issuing more USD through the arrangements to most of the worlds largest central banks. A swap is an agreement in which the Fed trades US Dollars for an equivalent value of the other central bank's currency. For example, the Fed may trade $20 billion for 23 billion Swiss francs at today's exchange rate. Why would the Fed do this and what does it mean for the value of the dollar versus the other majors?

The bank of Japan announced late last week that its U.S. dollar funds-supplying operations will also be conducted for an extended period. The BoJ had delayed taking part in the announcement on Feb 3rd until its policy meeting was complete later in the month.

Trading currency like this is supposed to increase the supply of dollars so that other central banks can auction and distribute them to their own commercial banks. Increasing the supply of dollars should help ease the credit market in these other countries.

This is needed because many commercial transactions around the world are done in dollars rather than the domestic currency so the supply of dollars is a critical component in running a smooth economy. The Fed's actions are largely seen as being very supportive for stimulus plans taking shape around the world and in the U.S. itself.

The injection of dollars in exchange for foreign currency is also very supportive from a fundamental perspective for the USD itself. The dollar has been strengthening in recent months and has begun to channel in a consolidation over the last few weeks. The signal here is that there is still strong demand for USD, which can help traders think about what direction they should be looking for trades.

Comments

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Jim - Thanks

|2009-02-04 10:33:54

Very interesting - I'm sure the Fed know which way the $ will be moving shortly!

John Jagerson - Fed

|2009-02-04 10:41:18

Yeah - too bad we all don't get the same memos they do eh?

Lukas - ???

|2009-02-05 09:27:28

I think this explanation is to easy to be true.....

John Jagerson - Does everything have to be hard?

|2009-02-05 09:51:10

If I translated it into Latin would you be more comfortable with the
explanation?

Of course I made a few generalizations since the terms for the
swaps and redemptions are varied but this is essentially what is happening. The
bottom line of demand for USD by central banks in these swap transactions is
valid.

carol

|2009-02-12 14:05:02

It's disconcerting to see the disconnect between your happy,
oh-what-a-beautiful-morning expression and the dismal economy you are discussing
at the beginning of the clip. Your message loses credibility because of
it.

Thanks for the explanation.

John Jagerson - Oh-what-a-beautiful-day!

|2009-02-12 17:53:20

Just imagine allowing world economic events dictate how I feel inside? What a
terrible way to live.

Seriously though, the fact remains that investors can
either be victimized by events like this or evaluate ways to turn it to their
advantage or at the very least minimize the impact to them personally. That is
what I am trying to convey in the videos we produce.

There are plenty of
other places to go for dismal news and sour expressions.

david sullivan

|2009-02-22 14:41:24

I usually say little but want to express how for over 2 years I have enjoyed and
deeply appreciated both John and Wade's consistent clarity in presentation and
obvious hard work in helping me understand a wealth of financial subjects. I
respect and honor your hard work John.

John Jagerson - Awwww shucks!

|2009-02-23 02:27:43

Thanks for the note David.

obyno - Trading the USD

|2009-02-23 17:02:10

Thanks 4 the explanation. I guess i know which currency to trade and make profit
now.

dunhill1907 - great

|2009-02-23 20:57:06

eyh this is brilliant but i think u should add more significant ideas how it
elevate down the yen man

Alex I - Very Helpful

|2009-02-25 04:28:18

Just found your website last week. Your explanations on current events help me
understand and clarify what's going on in the market. Look forward to your
insights. Thank you.

OneJam - Fed SWAP Unwinding ....... When ?

|2009-02-28 12:35:30

As a FX trader, how do u know before the time that the Fed with unwind the SWAPS
?

Also can we see the foot print of these SWAP transactions on the charts,
just interested to see if that kind of transfer would be easily seen in candle
sticks.

Peter S - thanks!

|2009-03-02 11:03:09

John - Given that the FED is a private bank with fiduciary interests, who keeps
the profit that you refer to in the video. My guess is the shareholders of the
FED. And the US Treasury and the taxpayers get gilch! Am I wrong?

Thanks for
the great work! I really appreciate it.

John Jagerson - The Fed's profits

|2009-03-02 13:26:58

Well, you are mostly right but a little wrong...

There has always been a lot
of controversy around the Federal Reserve system and fractional reserve banking
in general. Some of this controversy and criticism is totally legitimate and
should be debated. However, like everything else in this industry there are huge
packs of exaggerations and myths sold by conspiracy theorists, politicians and
gold bullion retailers. So be careful.

Here are a few facts:

The Fed is a
privately owned institution but it is one of those funny quasi-government owned
institutions that has its board appointed by the government but is
"owned" by its member banks who are in turn owned by their private or
public shareholders.

The Fed remits almost all of its "profits"
(about 90-95%) which includes a great deal of interest earned on U.S. debt back
to the treasury each year. A statutory 6% dividend is also paid out to the
me...

John Jagerson - The Fed's profits continued...

|2009-03-02 13:29:49

...A statutory 6% dividend is also paid out to the member banks on the stock
that they own in the Fed. It is true that the Fed does not pay taxes on its
earnings but the member banks do pay taxes on the dividend. This works very much
like an Limited Liability Corporation (LLC) for tax purposes.

Since the
dividend is prescribed by statute the management of the Fed is not really trying
to maximize shareholder value like a regular private enterprise would. This
limits the amount of "fiduciary duty" the Fed is really responsible for.

If you want to get access to these profits yourself, buy some ownership in a
member-bank. There are many that are publicly listed but these days that
membership isn't doing those shares a lot of good.

You can check some of
this out including the financial statements and the audit letters from the two
private auditors that examine the Federal Reserve Board each year here. I am
w...

John Jagerson - The Fed's profits continued ... again

|2009-03-02 13:30:36

...You can check some of this out including the financial statements and the
audit letters from the two private auditors that examine the Federal Reserve
Board each year here. I am warning you though that it is very very boring -
Unlike our videos ;) right? Right?

http://www.federalreserve.gov/boarddocs/
rptcongress/annual07/sec6/c3.htm

Jon - Fed shareholders

|2009-03-03 03:16:22

John,

Let me commend you for the excellent work first.

I have a quick qn.
Do you know who the large shareholders of the private banks that own the Fed
are. Where can i get more information on the same.

thanks, Jon

John Jagerson - Owners

|2009-03-03 04:03:40

The shareholders are mostly the same pool of companies that own most stocks.
They include insurance companies, hedgefunds, mutual funds, large individual
investors. If one owner has a very large percentage they will be disclosed in
the financial statements.

Peter S - Fed Conspiracy Theories

|2009-03-03 07:10:24

John - Thanks for your clarifications. You are absolutely right about conspiracy
theories floating around about the Fractional Reserve System and the
creation/role of the Fed.

In fact I came across this video series on You Tube
called the Money Masters which is somewhat conspiratorial in nature but they
seem to provide a lot of testimonials/data in support of their
allegations.

http://www.youtube.com/watch?v=QlI hhYGujoQ

I'd be curious to
hear your take on it.

Thanks again.

Peter S - Fed Conspiracy Theories

|2009-03-03 07:12:56

Sorry.. The youTube link should be

http://www.youtube.com/watch?v=QlIhhYGujoQ

John Jagerson - Victim or beneficiary

|2009-03-03 09:03:24

Most of this kind of stuff is a mix of truth and fiction however, I don't think
that is the point.

Has modern finance (aided by governments) led to
inequality and risk - I think so. But to me that is not the right question. The
right question is which side will I be on? Will I be a victim or a beneficiary
of the opportunities in the market?

I feel that it is perfectly reasonable
for anyone to educate themselves enough to understand what is going on and how
they can avoid getting trampled...

... Regardless of who owns the Fed.

Sylvia Morris - swaps?

|2009-03-07 09:27:12

Are these swaps also called fixins'? Very interesting.

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