FED: NY Fed's Williams: "Optimal" Level Of Reserves Is Case-Dependent
There are multiple factors that should be weighed in considering the "optimal" level of bank reserves, NY Fed President Williams said in a speech at a monetary policy implementation event this afternoon (link).
- There's little new here and Williams was speaking in the abstract, as in, not directly addressing the Fed's balance sheet policy (the audience includes international central bank attendees), but with the Fed having eased up on QT in March and aiming to bring reserves down to "ample" from the currently "abundant", Williams's comments (and those due later from current SOMA head Perli) are worth noting. (In Q&A Williams discussed differing ways of targeting interest rates, including the Fed vs BoE).
- Williams reminds that this is a supply and demand issue: "a central bank faces a demand curve for reserves that describes the relationship between the quantity of reserves and the spread between the policy rate and the interest rate on reserves.... the demand for central bank reserves is inherently nonlinear and subject to uncertainty...A central bank is assumed to target a level of the spread ... that lies in the region of ample reserves.... The central bank has potentially two tools that it can use to achieve this objective. First, it sets the aggregate level of reserves available to the banking system.. Second, it may make available a lending facility to the banking system that offers loans to banks at an interest rate."
- "absent a lending facility, the optimal supply of reserves under uncertainty is greater than it would be absent uncertainty...uncertainty can imply that it is optimal to supply abundant reserves even if the central bank’s target spread is in the ample reserves region"
- "the ideal choice for the supply of reserves depends on institutional factors, such as the pricing of and frictions related to liquidity facilities as well as preferences over the various goals related to monetary policy implementation...there is no single best way to supply reserves; rather, the best mix of tools depends on circumstances and policy preferences unique to each jurisdiction".
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USDJPY TECHS: Bear Cycle Extends
- RES 4: 149.28 High Apr 3
- RES 3: 148.03 50-day EMA
- RES 2: 145.25 20-day EMA
- RES 1: 142.25/143.28 High Apr 21 / 16
- PRICE: 140.78 @ 16:18 BST Apr 22
- SUP 1: 139.79 1.382 proj of the Feb 12 - Mar 11 - 28 price swing
- SUP 2: 138.82 1.500 proj of the Feb 12 - Mar 11 - 28 price swing
- SUP 3: 138.07 LowJul 28 ‘23
- SUP 4: 137.85 1.618 proj of the Feb 12 - Mar 11 - 28 price swing
The trend condition in USDJPY remains bearish and this week’s fresh cycle lows reinforce this condition. The extension down confirms a resumption of the downtrend and maintains the price sequence of lower lows and lower highs. Note too that moving average studies are in a bear-mode position highlighting a dominant downtrend. Sights are on 139.79 next, a Fibonacci projection. Initial firm resistance to watch is the 20-day EMA, at 145.25.
EURGBP TECHS: Support Remains Intact
- RES 4: 0.8800 Round number resistance
- RES 3: 0.8781 2.236 proj of the Mar 3 - 11 - 28 price swing
- RES 2: 0.8768 High Nov 20 ‘23
- RES 1: 0.8624/0.8738 High Apr 21/ High Apr 11 and the bull trigger
- PRICE: 0.8580 @ 16:17 BST Apr 22
- SUP 1: 0.8520 20-day EMA
- SUP 2: 0.8477 61.8% retracement of the Mar 28 - Apr 11 rally
- SUP 3: 0.8442 50-day EMA
- SUP 4: 0.8415 76.4% retracement of the Mar 28 - Apr 11 rally
The latest pullback in EURGBP appears corrective - for now. The retracement has allowed a recent overbought trend condition to unwind. Support to watch lies at 0.8520, the 20-day EMA. Below this level, support at the 50-day EMA is at 0.8442. The area between these two averages represents a key support zone. For bulls, a resumption of gains would refocus attention on 0.8738, the Apr 11 high and bull trigger.
BONDS: EGBs-GILTS CASH CLOSE: OATs Underperform, UK Curve Bull Steepens
European FI had a constructive session in the return from a 4-day holiday Tuesday.
- Shrugging off Monday's US Treasury weakness, curves bull steepened early, continuing from Thursday's pre-holiday, post-ECB price action.
- OATs underperformed, with Bloomberg reporting that President Macron is considering calling a snap legislative election in France as soon as the autumn.
- In other developments, BOE's Greene sounded less hawkish on the rate outlook compared with her previous appearances, helping UK rate cut pricing deepen, while Eurozone flash April consumer confidence printed the weakest since November 2023.
- Yields saw a modest spike in the minutes ahead of the cash close on a Bloomberg report that US Treasury Secretary Bessent expects a de-escalation in US-China trade tensions.
- The UK curve bull steepened sharply, with Germany's bull flattening. Periphery EGB spreads were flat/slightly tighter to Bund.
- Tuesday's calendar highlight is flash April PMIs, while we also get UK public sector net borrowing data and an appearance by BOE's Pill, Bailey and Breeden.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 2.5bps at 1.661%, 5-Yr is down 3.7bps at 1.982%, 10-Yr is down 2.9bps at 2.443%, and 30-Yr is down 3.7bps at 2.859%.
- UK: The 2-Yr yield is down 9bps at 3.83%, 5-Yr is down 6.4bps at 3.98%, 10-Yr is down 2.1bps at 4.545%, and 30-Yr is up 2.9bps at 5.368%.
- Italian BTP spread down 0.7bps at 116.6bps / French OAT up 1bps at 77.5bps
