Forward premium anomaly, in the sandbox

The forward premium anomaly in currency markets (also referred to as the forward premium puzzle or the Fama puzzle) refers to the well documented empirical finding that the domestic currency appreciates when domestic nominal interest rates exceed foreign interest rates.^[1] This is by some perceived as puzzling because one hypothesis has been that expected future change in the exchange rate between two countries is equal to the interest-rate differentials between these two countries. The idea behind the hypothesis is that if all currencies are equally risky investors would demand higher interest rates on currencies expected to fall in value.

OK, use a sandbox loop. thee is a queue to obtain carrier fiat, then the short loan queue, then the return queue to recover home currency.  At equilibrium, flow is measurably consistent, queues stable. Total queue size around the loop remains the constant, the loop is being priced.  At equilibrium, the fiat exchange rate goes as trade. All things are not equal ,there are at least one other major currency interfering. There should be a no-arbitrage solution.

And real goods, the ultimate conserved quantity, is extremely quantized, or containerized, if you will.  But real economies are always rescaling.

So, there should be measurable insurance cost, buying the currency with higher rates has more variance in the buyers queue. The insurance costs is based on currency exchange volatility, naturally. So if I am running a futures gambit on a currency, then I am comparing exchange volatility, in entry and exit vs differential gain from 'rates'. If my currency banker is worth the money we pay it, then that arbitrage should have a short half life.

Again, the biggest uncertainty is that the larger economy has the longest, and most incomplete sequence, it generates risk, it is under sampled. But that issue is deemed separated from the forward puzzle. Long term imbalances carry MMT risk.

This chart is only half the story:

The one year cross the exchange rate often, they are well hedged. The equivalent exchange insurance is well priced. The loop is always there, so it is always hedged, it is the $20 bill on the sidewalk.

The US one year has a dominating effect, likely the shear willingness of taxpayers over here.  So, when the one year started to peep up, the dollar suddenly reset higher.  So FX exchange rates will be strongly effected by willingness to queue up for treasury deposits. The wait into the dollar, into to and out of treasuries,  the two longest queues.

The real economy is adapting as our unwillingness to use credit increases. The real economy is forcing quantized prices.