Repo Rates and Spot Currencies

Recognize that two repo rates and two different markets exist, one for an official government rate and one for the private interbank market. This was created by osmosis, by necessity due to market stress before and after Lehman, but proceeded further with other crisis announcements of bank failures, bank stress tests, and the Greek debt crisis. A crisis of confidence existed.

As important as this market is to inform other rates, all central banks had to review this market. Changes will occur. One obvious change is the renewed daily focus for central banks to guide market operations toward their target rates. This translates to guiding monetary policy toward the Consumer Price Index. This can only mean repo rates may be steered toward the target of inflation. Targets have a range but a small window. This may require a restriction to the repo market as higher margins and quality collateral may be the cost of business. Most important about this scenario is that repo rates establish a floor, the bottom of interest rates. Spot prices can't fall below this floor, regardless of the pair.