Now let’s restate the information in these FRR curves into differences and see whether the courses of the two currencies can be related to them.

If we map the difference between the USD and USD FRR6,9 against the course of the EUR itself, we see two patterns emerge. First, there is a defined leading relationship. The FRR spread leads the EUR by 31 weeks.

We should expect FRR changes made today to be reflected in the exchange rate seven months from now. Second, the spread is as negative as it ever has been; never before in the history of the EUR has its FRR6,9 been as steep relative to the USD’s. The only other period of prolonged negativity occurred between mid-1999 and the end of 2000, a time of EUR weakness. Finally, the trend which began in 2004 actually accelerated after Ben Bernanke was appointed to be chairman of the Federal Reserve in October 2005; this defies the popular belief Bernanke is an easy-money inflationist.

What happens if we repeat the exercise with the JPY? As was the case with the EUR, the steepness of the JPY relative to the dollar is near its highest level since the advent of the EUR. And as was the case with the EUR, the FRR spread leads movements in the currency, in this case by 19 weeks. Past performance does not predict future results, but note how a previous period of divergent FRRs in 2000 preceded a significant selloff in the JPY. The assumption then was the Federal Reserve would begin cutting interest rates aggressively in the aftermath of the burst stock market bubble and this would stimulate economic growth in the U.S. vis-à-vis Japan. The ability of the JPY to rally in such an environment suggests the currency market is making the opposite bet today — that the long string of rate hikes in the U.S. will slow the pace of U.S. growth while Japan continues to prosper in the general Asian economic boom.