News & analysis

The US dollar continues to trade on the back foot in today’s session following its fall from grace yesterday. The DXY index, which tracks the dollar’s performance against most major trading partners, continued its fall this week from a 4-year high. The increased liquidity measures imposed by the Federal Reserve globally has taken some of the funding pressures off of the greenback in FX markets.

Yesterday saw an increase in the uptake of USD demand in central bank auctions as the Fed’s swap lines with the likes of the Bank of Japan, European Central Bank, Swiss National Bank and Bank of England all began to feed through. Even though the Bank of Canada constitutes part of the “core” group of central bank members to receive the increased swap facility, they are yet to extend this to their local banking sector [see yesterday’s note on CAD for more details].

The Bank of England has stepped up its USD offering, embarking on the daily 7-day USD repo auctions along with other core members such as the SNB, ECB and BoJ, while it also announced the use of its new program the Contingent Term Repo Facility (CTRF). Even though the scheme has technically been in place since 2014, it will be used for the first time tomorrow and then again on the 3rd of April.

The CTRF is a flexible liquidity insurance tool that allows participants to borrow cash from the central bank, which could potentially include USD, in exchange for less liquid collateral. The CTRF will lend reserves for a period of three months, similar to the 84-day day offering already in place, and should take some of the strain off of its six-month ITLR program already in place. The move comes after the banks bid £10.66bn at the ITLR weekly operation yesterday while only £7.2bn was allotted in liquidity, while the BoE USD liquidity offerings continue to be lapped up by dealers. The unbounded CTRF program should, in principle, clear the deadweight on primary dealers balance sheets and allow for a smoother transmission mechanism of lower rates into the real economy while also allowing increased liquidity to boost the number of loans issued.

In the Bank of England’s USD repo offering today, all of the £7.705bn allocated in 7-day maturities and £6.685bn in 84-day maturities was taken by core banks, also indicating the strains still in the UK’s financial sector.

Additionally, there has been increased uptake in the USD repo offerings by the ECB and the BoJ. The ECB allotted $17.3bn and $27.8bn in 7-day and 84-day auctions respectively where all of the allotted liquidity was taken by bidders, while the Bank of Japan has tapped more than $150b in the Fed’s swap line in just over a week. The situation in Japan is more concerning as cross-currency basis swaps still show an elevated premia for USD liquidity, while signs of stress appear in the JGB market. Rates in Japan’s repo markets, where bondholders connect with investors looking to borrow them, hit a record on Tuesday as primary dealers looked for further JGB access to post them as collateral for USD access via the BoJ auctions. This comes as a problem for the BoJ who has just stepped up JGB purchases to provide liquidity to the market. The rate hit a record negative level on Tuesday, which prompted the BoJ to conduct repo operations and announce additional measures to maintain stability in the market. A negative repo rate means investors purchasing the repo, i.e. providing the liquidity in term holding the bonds for a limited period of time, have to pay interest.

While the plumbing issues at play are interesting, it doesn’t directly have an impact in spot FX markets. However, it highlights that globally the dollar is still in high demand for a multitude of reasons and suggests that the greenback’s latest bout of weakness may be limited. This is notable in today’s price action as the dollar reverses early losses against JPY, GBP, EUR and CAD suffered in this morning’s session.

On the topic of the loonie…

The Canadian dollar has not only been boosted by today’s softer dollar in general but news that Trudeau’s CAD$82bn stimulus package passed through the House of Commons in the early hours of today’s session. Previously, the government’s bid to gain free reign on spending and taxation through to the end of 2021 to manage the crisis caused an uproar with the Conservative Party, which caused the blockade of the stimulus package in the legislature. According to Conservative lawmakers, the Liberals agreed to reduce this demand to six months, with the package now being sent to the Senate for approval. Both bumper fiscal packages in North America are subject to the approval by their respective Senate [discussion of US fiscal package in the MR].


Graph: Cross-currency basis swaps continue to demand a high premium to exchange JPY for USD despite BoJ auctions


Graph: Funding stresses filter into Japan’s repo market, prompting the BoJ to announce its focus will be on improving liquidity conditions


Graph: Currency performance today sees the dollar rebound from this morning’s session


Author: Simon Harvey, FX Market Analyst



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