something interesting

<  BACK TO Market Analysis

 

Mind the large gap between expected spot performance and expected total return. This of course reflects the fact that running USD shorts most often (not vs AUD and USD) implies a cost of carry. For EUR/USD, for example, that cost is 1.9% over one year, the largest cost in more than ten years. This largely reflects the short-rate differential – but not just that: large deviations from covered interest rate parity have become a quasi permanent feature. Two recent BIS papers1 analyse that deviation, which is most directly observed in the large levels of the cross-currency bases. A key finding from the BIS is that banks are less keen to lend in USD to non-US borrowers in periods when the USD is strong.

Also, USD strength tends to imply a fall in international reserves, hence a diminishing supply of USD in global markets. All this creates USD scarcity, which is a major concern given the need for non-US borrowers to roll very large amounts of USD-denominated debt. The outstanding of USDdenominated credit to the rest of the world has more than doubled over the past ten years to nearly $10tn (Graph 7a). EM countries and corporations in particular have been keen to borrow in USD ($3.2tn, Graph 7b). The rising rates and stronger USD will make it tougher to repay or roll that debt. This will tend to fan the search for USD, or scarcity.

c44.PNG

Why does all that matter for currencies? Because such scarcity does impact spot rates. Graph 8, for example, shows the link between the 2y cross-currency basis USD-EUR and spot EUR/USD. This is not where our major concern is, given that ECB tapering in spring should keep that cross-currency basis in check (see our dedicated x-ccy section).

More generally, however, as the cost of hedging USD longs increases, the USD tends to be supported (Graph 10). We fear that cost will continue to increase in 2017 as the Fed raises rates and non-US borrowers struggle to roll their USD-denominated debt. This channel of transmission could make the USD strength self-sustained and eventually disruptive for global financial conditions.

Also, global USD strength tends to be associated with a rise in USD/CNY, as China targets the stability of the RMB basket (Graph 11). In late February 2016, the G20 sealed an (initially) secret deal to fight excessive USD strength – as it was becoming too disruptive indeed. We cannot exclude a repeat, yet we are concerned that the aggressive tone of a Trump administration, relative to both protectionism and isolationism, might make such a deal initially tougher to achieve, in which case we may see bouts of extreme USD strength into spring.

c45.PNG

Source: efxnews.com

 

Mind the large gap between expected spot performance and expected total return. This of course reflects the fact that running USD shorts most often (not vs AUD and USD) implies a cost of carry. For EUR/USD, for example, that cost is 1.9% over one year, the largest cost in more than ten years. This largely reflects the short-rate differential – but not just that: large deviations from covered interest rate parity have become a quasi permanent feature. Two recent BIS papers1 analyse that deviation, which is most directly observed in the large levels of the cross-currency bases. A key finding from the BIS is that banks are less keen to lend in USD to non-US borrowers in periods when the USD is strong.

Also, USD strength tends to imply a fall in international reserves, hence a diminishing supply of USD in global markets. All this creates USD scarcity, which is a major concern given the need for non-US borrowers to roll very large amounts of USD-denominated debt. The outstanding of USDdenominated credit to the rest of the world has more than doubled over the past ten years to nearly $10tn (Graph 7a). EM countries and corporations in particular have been keen to borrow in USD ($3.2tn, Graph 7b). The rising rates and stronger USD will make it tougher to repay or roll that debt. This will tend to fan the search for USD, or scarcity.

c44.PNG

Why does all that matter for currencies? Because such scarcity does impact spot rates. Graph 8, for example, shows the link between the 2y cross-currency basis USD-EUR and spot EUR/USD. This is not where our major concern is, given that ECB tapering in spring should keep that cross-currency basis in check (see our dedicated x-ccy section).

More generally, however, as the cost of hedging USD longs increases, the USD tends to be supported (Graph 10). We fear that cost will continue to increase in 2017 as the Fed raises rates and non-US borrowers struggle to roll their USD-denominated debt. This channel of transmission could make the USD strength self-sustained and eventually disruptive for global financial conditions.

Also, global USD strength tends to be associated with a rise in USD/CNY, as China targets the stability of the RMB basket (Graph 11). In late February 2016, the G20 sealed an (initially) secret deal to fight excessive USD strength – as it was becoming too disruptive indeed. We cannot exclude a repeat, yet we are concerned that the aggressive tone of a Trump administration, relative to both protectionism and isolationism, might make such a deal initially tougher to achieve, in which case we may see bouts of extreme USD strength into spring.

c45.PNG

Source: efxnews.com

lastest Articles

Market Analysis
Forex Week Ahead – Central banks back to the fore
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Breaking: EUR/USD hits fresh highs as German Preliminary Manufacturing PMI beats estimates with 45.2
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Markets take a break from coronavirus fears, forward-looking data eyed
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
ECB’s Lagarde: To think that policy is on auto-pilot is ridiculous
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Higher USD/JPY is still on the cards – UOB
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Euro May Fall as the ECB Stays Cautious Despite Economic Upturn
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Coronavirus fears spread and weigh on markets, Aussie surges, all eyes on the ECB
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Euro Under Dark Clouds as Trump Threatens Auto Tariffs
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Stocks in Asia rise, mostly shrug off concerns over coronavirus
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BOE Preview: Goodbye Carney, hello rate cut? - Nordea
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
President Trump’s speech at WEF in Davos – Live
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Fed should turn to digital money to combat next recession
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD jumps to session tops, closer to mid-1.3000s on upbeat UK jobs data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD Forecast: Bears now await a break below 1.1065 confluence support
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Pound pressured by Brexit plans, oil bumps on Mod-East issues, Bitcoin hungover
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
ECB preview: It’s all about the strategy – ING
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week Ahead - BOJ, BOC, and ECB to keep rates on hold as markets focus on global PMI readings and earnings
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
US: Industrial production to retreat again in December – TDS
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
European stocks aim at fresh record on China data and Wall Street’s optimism
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Breaking: GBP/USD drops below 1.3100 after UK Retail Sales drop 0.6% MoM in Dec vs. +0.7% expected
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Crude Oil Futures: deeper pullback loses traction
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD prints weekly highs above 1.1160 ahead of ECB, data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Mixed feelings about the trade deal, US retail sales eyed, cryptos consolidate
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold Futures: further signs of consolidation
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Crude Oil Futures: an interim low seems in place
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Tariffs weigh on markets, pound recovers ahead of data, Bitcoin takes a breather
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD Price Analysis: Focus remains on the 200-day SMA near 1.1140
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
US: Focus on Fed speak and CPI today – Rabobank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Trade optimism sends USD/JPY above 110, cryptos climb, US inflation eyed
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week ahead – It’s a trade deal!
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Company News
The WAIT Is Over
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BOE’s Tenreyro: UK labor market is not tightening further, GBP/USD drops 20-pips
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD stays cautious near 1.1100 ahead of Payrolls
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
AUD/USD pares early gains, turns red near 0.6860
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold drops to fresh weekly lows, around $1540 level
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Sell-offs in gold, oil and Bitcoin following Mid-East calm, central bankers eyed
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/JPY Technical Analysis: Bulls struggling near 141.20-30 confluence support
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold hits fresh multi-month tops, around $1545 region
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Fear grips markets as US kills top Iranian commander, ISM, FOMC awaited
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD: Recovery mode intact on 1.32 after UK Final Dec Manufacturing PMI disappoints with 47.5
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
AUD/USD: Weaker around 0.7000 as USD recovers
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: Bulls look to test multi-month highs near 1.1240
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
PAMMs Yearly Update
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
USD/CAD struggles to shakes off bearish pressure, trades around 1.3070
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: EUR/USD tops 1.12, AUD/USD nears 0.70, as end-of-year dollar pressure set to extend
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week Ahead: Market Rally Still Going Low Holiday Volumes Awaiting Start of 2020
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Company News
Merry Christmas
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Canada: Weakness in consumer spending continues – RBC
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Gold outshines amid trade deal woes in Christmas Eve markets
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: Bounce still capped below 1.1100 ahead of US data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Pre-Chirstmas quiet trading seeps in alongside US-China trade optimism, US data eyed
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Asian stocks: Political pessimism weighs over US-China trade progress
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week Ahead: Market in Holiday Mode Despite Impeachment and Brexit
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Company News
Christmas and New Year Trading Schedule
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD: Supported here?
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: More downside? – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
China's Premier Li: Pressure on China's economy could be even bigger next year
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BOJ’s Kuroda: Will continue to closely watch developments of US-China trade talks
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Trump’s Forex Today: Trump’s impeachment caps dollar gains, Aussie jobs boost AUD; focus on BOE, Brexit drama
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/GBP: Capped here – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Former ECB Head Draghi: Central banks must be ready to use all tools in their mandate
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Brexit redux and trade fears continue to hurt risk appetite, favor dollar
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BOJ's next move is to dial back stimulus - Reuters poll
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD off lows, still below 1.1150 amid USD comeback
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Fresh Brexit risks pound GBP, Aussie hit by RBA; UK jobs next of note
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Powell punches dollar, Boris' judgment day, Trump's tariffs decision, Lagarde's ECB debut
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: On a high – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold sidelined near $1465 level, FOMC awaited
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Fed may cut once more – Danske Bank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Shirking majority for Johnson, Fed to stand pat through 2020?
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week Ahead – The UK election is upon us
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
USD/JPY Technical Analysis: Bears challenge 50-DMA, ascending trend-line confluence support
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD sidelined around 1.1100 ahead of key US data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Happy Friday for trade talks, GBP/USD holding onto Boris boost, all eyes on the NFP
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
OPEC+ said to discuss deeper oil cuts – RTRS
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold holds steady near $1475, weaker USD lends some support
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Kiwi lifted by RBNZ amid cautious optimism; eyes on OPEC+ meet, trade
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Asia: PMIs back in expansion territory – TDS
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD stays firm near 1.1100, looks to data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BoC Preview: Major Banks expecting BoC to hold fire today
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
US: Mixed manufacturing data – Deutsche Bank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold: Back in the red around $ 1460 amid USD comeback
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Trump's tariffs weigh on USD before meeting Boris, AUD surges, EUR rising
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Australia: Dwelling approvals weaken – Westpac
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
UK Industry: Brexit, weak global demand to hurt UK in 2020
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: China lifts mood, Boris and Merkel in trouble, critical data kicks off December
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Week Ahead - Market Awaits China Retaliation on Trade
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BOJ’s Kuroda: Not thinking of further easing at present
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD looks for direction near 1.10 ahead of key data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Soggy Black Friday mood, GBP/USD retreats, EZ inflation awaited
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
AUD/USD struggles near multi-week lows, just above mid-0.6700s
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
ECB’s Villeroy: Brexit uncertainty likely to last for at least some quarters in the future
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Sterling surges as poll backs Boris, dollar bulls thankful, Trump angers China
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
If Trump refuses to roll back tariffs, loss to American farmers could be permanent – Global Times
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD is offered near term – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Massive pre-holiday US data dump, Trump holding back deal, critical UK poll eyed
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
UK: Disorderly Brexit comes off the table – ABN AMRO
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD faces dual resistance lines, downside is easier – Confluence Detector
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Markets doubt US-Sino progress, Powell sees glass filling, GBP/USD spooked by poll
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD could still re-test the vicinity of 1.1100 – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613