FX markets wake up at the worst time
Nov 22 (Reuters) - FX markets have woken up at the end of the year when a lack of liquidity makes it harder to hedge and will exacerbate the impact of any flows.
The situation may worsen as liquidity is further diminished in December and, given the sharp rise in demand for dollars since the U.S. election, it may be prudent to consider the possibility of a shortage of dollars,
While that is the extreme of any situation that could result from liquidity issues, there is clearly more demand for the dollar than supply.
The most notable example of this was the sudden EUR/USD plunge following PMI data On Nov. 22. EUR/USD is by far the deepest currency pair and for it to move in such a sharp and unexpected way is clearly concerning.
For certain, the amount of liquidity afforded traders will soon diminish and will probably begin to decline markedly after Thanksgiving Day.
From that point most traders are usually thinking about next year and the will to gamble and invest subsides, leaving fewer participants and therefore less liquid conditions for the remainder of the current year.
That isn't an issue if it is quiet, as has been the case for EUR/USD for almost two years, but with the pair breaking out of a long-held range, it could be an acute problem with traders needing to hedge but finding it increasingly difficult to do so.
Cross currency basis swaps have widened sharply this month in a clear warning about the difficulties facing traders in the next few weeks.
For more click on FXBUZ
EURUSD and EUR cross ccy basis swap https://tmsnrt.rs/4eGLF4L
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
</body></html>Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
