Volatility creates uncertainty and sees the cost of buying dollars increase. This is creating pressures for year end turn funding.
The past few weeks have seen the rise of the good old seasonal topic of year end turn funding. Here at MillTechFX, from speaking to liquidity providers, their franchise year end roll requirements have now largely been executed, however, that didn’t stop the rolling activities over the past two or three weeks creating pressure.
In past years, the shift in forward points has been volatile, especially in 2017/18. Globally Systemically Important Banks (GSIBs) have made efforts to reduce this problem going forward. However, things have not worked out as smoothly as they hoped.
In this chart you can see how the absolute charge of what it costs to borrow US dollars over the turn has changed.
Considering the larger GSIB buckets and the ongoing additional liquidity coming from central banks, the big concern for traders was the unexpected recent widening.
The main reason for this is that, since the start of the month, equity markets have rallied, especially in financials. Over the past week, despite significant volatility the S&P 500 was up nearly 1.4% and NASDAQ was up by 1%. This is placing increasing strain on GSIB outlooking, which comes through two channels:
- A higher market cap for financial firms lifts the value of the equity capital buffer.
- Rising values for the broader equity market increases the value of securities held on bank balance sheets.
This has seen renewed stresses on year end turn prices as shown in the chart above, with banks now seeking to reduce “cross jurisdictional” activity, forcing USD’s to migrate from GSIB intensive activity.
In turn this has caused forward points shifting in such a way that any buy/sell rolls have become more expensive. In the example below, the cost of two-month EUR/USD points had moved from +15 pips to +24.
However, clarity is coming. Once November month end and mid Dec IMM (16th) rolls passed, the vast majority of activity should be complete. Banks should then have more clarity regarding their balance sheets through to year end. Then any ‘spare’ balance sheet could be used for lending USDs in the market and the turn premium will begin to price out.
With such volatility in the market it pays to work with a partner who understands the current climate and can offer fast, seamless, and low-cost execution. This is one reason why our platform at MillTechFX could prove so effective.
Keywords: liquidity, USD, dollar, FX markest, GSIB, banks, volatility.
Source: Millennium Global Treasury Services Limited (“MGTS”), 15.12.2020. This material should not be construed as an offer to sell or the solicitation of an offer to buy any financial instrument in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of persons and the terms and conditions of any transaction if between us, if any were to take place, would be subject to further discussion and negotiation between us. It does not constitute a recommendation and may not take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and persons may realise losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. This material is for the general information of persons and is a solicitation of derivatives business generally, only for the purposes of, and to the extent it would otherwise be subject to, CFTC Regulations 1.71 and 23.605. The material is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such and MGTS and the source of such information or data, shall not be responsible for errors or omissions that may occur. We will not update or amend such information following the date it was delivered to you. MGTS shall have no liability, contingent or otherwise, to any recipient or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of, or otherwise in connection with, any information provided to you.
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