China's Dollar Swap Addiction
Summary
Discussion of $1T (ER) excess reserve deposit (IBDD) leveraged by Eurodollar and Euro/USD forward swaps held in NY Foreign Bank's.
Examination of Central Bank Forward FX Swap Usage.
Analysis of potential forward effects on PBOC and other EM central banks.
Discussion of effects on the dollar, commodities, global equities and bond markets.
Forward Currency FX Swap
A swap is a financial tool to ease transactions by exchanging certain elements of a loan in one currency, like the principal or interest payments into an equivalent loan in another currency.
Currency forward is an obligation of two parties to convert an agreed amount of one currency into another by a certain date at an exchange rate specified at the moment of signing the deal.
With forwards, not only are FX reserves conserved for other uses, but buying the local currency in spot markets with UST sale proceeds is not necessary, so the domestic float and liquidity does not suffer. However,future swaps just kick the can forward and can make the settlement of the debt, much more costly and difficult.
"If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic," said Citigroup's Steven Englander. "Down the road you can't avoid it."
Friday Oct 23rd FX Pairs
October 23rd - Enter The "Draghi" threw the Euro under the bus while CHINA cut, Dollar up but strange? Dollar down vs RUB, BRL and CNY?? So either someone had to cover on EUR funded FX carry trades? Or someone must be dumping treasuries and buying something with those dollars, ah yes, their own currency, lowering their float, raising ours.
Buying their own currency would be the traditional way. But, maybe something else is going on? Lets have a closer look.
Summary
Discussion of $1T (ER) excess reserve deposit (IBDD) leveraged by Eurodollar and Euro/USD forward swaps held in NY Foreign Bank's.
Examination of Central Bank Forward FX Swap Usage.
Analysis of potential forward effects on PBOC and other EM central banks.
Discussion of effects on the dollar, commodities, global equities and bond markets.
Forward Currency FX Swap
A swap is a financial tool to ease transactions by exchanging certain elements of a loan in one currency, like the principal or interest payments into an equivalent loan in another currency.
Currency forward is an obligation of two parties to convert an agreed amount of one currency into another by a certain date at an exchange rate specified at the moment of signing the deal.
With forwards, not only are FX reserves conserved for other uses, but buying the local currency in spot markets with UST sale proceeds is not necessary, so the domestic float and liquidity does not suffer. However,future swaps just kick the can forward and can make the settlement of the debt, much more costly and difficult.
"If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic," said Citigroup's Steven Englander. "Down the road you can't avoid it."
Friday Oct 23rd FX Pairs
October 23rd - Enter The "Draghi" threw the Euro under the bus while CHINA cut, Dollar up but strange? Dollar down vs RUB, BRL and CNY?? So either someone had to cover on EUR funded FX carry trades? Or someone must be dumping treasuries and buying something with those dollars, ah yes, their own currency, lowering their float, raising ours.
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