Japanese Yen Interbank Rates Surge, Rollover Rates Rise
The Bank of Japan has reacted to recent geopolitical turmoil in convincing fashion, boosting liquidity available to banks and other financial institutions but aggressively limiting liquidity for Japanese Yen speculation in forex markets. The overnight Japanese Yen London Interbank Offered Rate (LIBOR) has subsequently seen its largest single-day surge since the height of the financial crisis and forced dislocations in Japanese Yen rollover charges and credits.
The surge in the overnight Japanese Yen LIBOR rate has caused a significant dislocation in FX forward markets. Currency forward rates are the benchmark used for rollover charges/credits between banks, which in turn guide rollover charges/credits to the FX broker’s customer. In normal markets, overnight LIBOR rates closely reflect central bank interest rate targets and forward rates are calculated accordingly.
Yet recent moves have meant that Japanese Overnight interbank rates have jumped considerably, which have in turn led to sharp corrections in forward markets. For example, the current overnight London Interbank Offered Rate (LIBOR) for the British Pound Sterling is 0.56 percent as set by the British Bankers Association. The Japanese Yen rate jumped from a minimal 0.11 percent to 0.49 percent in a single day—its largest single-day surge since the height of the global financial crisis in September, 2008. It is perhaps little surprise to subsequently note that overnight forward points British Pound/Japanese Yen pair have turned positive through very recent price action.
The chart below shows the difference between British Pound/Japanese Yen spot rates and the equivalent one-day forward. This is the spread used to calculate rollover charges and credits. Given that British Pound interest rates have been consistently higher than their Japanese equivalent, a person selling the spot rate would have paid the difference between spot and forward prices on the day’s rollover. Yet the most recent shift means that the difference between spot and forward rates has turned positive for the first time since similar market dislocations in November.
Traders should keep a close eye on Japanese Yen positions through near-term trade, as they may actually find themselves paying rollover charges if they are long OR short the Japanese Yen. This may remain the case until overnight interest rates return to normal and credit markets function as usual.
Written by David Rodríguez, Quantitative Strategist for DailyFX.com
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