The currency market has recently been struck with adverse Bid/Ask spreads and unfavorable interest rate rolls stemming from evolution of a global financial crisis. Indeed, the lack of liquidity in today’s very volatile market place has made it difficult to assume leveraged positions. More succinctly for FX traders, the drop in market liquidity has led to the recent spike in overnight borrowing rates. In turn, this has led to tight or even negative interest rate rolls for many pairs at the interbank level. In reality, rollover in the Forex Market reflects more than just the benchmark interest rate differential between two currencies; and the true spread between accessible borrowing and lending rates helps us to understand why one trader could have to pay rolls even if he holds a long position in the highest yielding currency. Looking ahead, financial markets are likely to remain under a considerable stress; but the recent injections of liquidity by the world’s preeminent central banks and efforts to improve policy should help to alleviate some pressure in the financial system over time.
Money market difficulties are quite visible in overnight borrowing and lending rates, as dealers make it prohibitively expensive to hold positions that they view risky to their own operations. In fact, US Dollar Overnight London Interbank Bid Rates, or the rates at which banks are willing to bid for overnight borrowing from other banks, skyrocketed over 400 basis points in the span of a single day. Such a dramatic move underlines banks’ unwillingness to lend to each other and the true scarcity of such funds.
US Dollar Overnight London Interbank Bid Rate (Libid)
No comments:
Post a Comment