The Return Of USD Scarcity

Published 08/30/2017, 04:39 AM
EUR/USD
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The looming decision on the US debt ceiling and Federal Reserve getting ready to pull the trigger on quantitative tightening means that USD liquidity could start to become scarce from Q4.

A rebuilding of the US Treasury cash buffer alone would remove about USD350bn from the money market over the last four months of the year.

In our view, this is not currently fully reflected in market pricing of EUR/USD cross-currency basis (CCS), which could widen further in a situation where USD liquidity tightens significantly.

Clients with USD assets may position for a tightening of USD liquidity in Q4 by receiving 3M1Y EUR/USD CCS or roll hedges which mature in Q4 forward. The latter would also hedge a December US rate hike, which we forecast, but is currently only priced with 30% probability.

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