Though markets have hardly escaped difficult conditions altogether, we already see significant improvements in overnight lending rates and other key measures on the interbank lending level. US Dollar Overnight London Interbank Offered Rates, or the rates charged for overnight lending between banks, have fallen over 300 basis points in four days. Though these numbers remain significantly above the equivalent risk-free rates, we finally see signs of improvement in clearly distressed interbank markets.
If money markets and general liquidity continue to improve, this will translate into lower bid/ask spreads and more favorable overnight borrowingrates on margin forex positions. Already we see that implied volatility rates on options have eased from their recent heights, and a further easing would signal that markets are pricing in favorable forex trading conditions through the near term.
Written by David Rodriguez, Quantitative Analyst for DailyFX.com To contact the author of this report, e-mail drodriguez@dailyfx.com