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USD Boost in Short Term on Today's Large Fed Balance Sheet Unwind

USD Boost in Short Term on Today's Large Fed Balance Sheet Unwind

2018-07-31 09:00:00
Justin McQueen, Analyst
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USD Analysis and Talking Points

  • Federal Reserve Balance Sheet Unwind to Lead to Largest Net Liquidity Impact Thus Far
  • USD Typically Bid on Redemption Days

See our Q3 FX forecast to learn what will drive major currencies throughout the quarter.

Federal Reserve Balance Sheet Unwind

Last year the Federal Reserve announce that they would slowly begin to shrink the Federal Reserve balance sheet from October, starting at a rate of $6bln/month and working up to a maximum of $50bln, in order to unload the $4.5tln of bonds acquired by the central bank through its QE program.The Fed has been rolling over its holdings of debt on expiry date, however it is now in the process of letting the debt roll of its balance sheet and redeeming the full amount paid for the bonds, creating a demand for Dollars in the process.

Short term Impact on the USD

Typically, on days with a large and negative impact USD liquidity, the Dollar has tended to gain while risk sentiment has been softer. At the last settlement day (Jul 2nd) from the most recent SOMA (System Open Market Account) redemption (Jun 30th), the USD gained a bit against its major counterparts. Today marks the next redemption day is Jul 31st when $28.5bln is due, whereby the net liquidity impact will be the greatest thus far (-$24bln).

Long USD on SOMA Days

Based on the past 5 SOMA redemption days, long USD has been a good proposition, given that these days have on average coincided with the Dollar index moving higher by 0.3% with a hit ratio of 80%.

Dates

Par Value

Daily Impact on US Liquidity

Monthly Cap

USD Performance

Oct 31st 2017

$8.7bln

-$6bln

$6bln

0%

Nov 15th 2017

$11bln

-$3.5bln

$6bln

0%

Nov 30th 2017

$7.9bln

-$2.5bln

$6bln

-0.1%

Dec 31st 2017

$17.5bln

-$6bln

$6bln

0.1%

Jan 31st 2018

$27.6bln

-$12bln

$12bln

0%

Feb 15th 2018

$16.6bln

-$4.1bln

$12bln

-0.6%

Feb 28th 2018

$32bln

-$7.9bln

$12bln

0.3%

Mar 31st 2018

$31.2bln

-$12bln

$12bln

0.1%

Apr 30th 2018

$30.4bln

-$18bln

$18bln

0.3%

May 15th 2018

$26.2bln

-$8.6bln

$18bln

0.7%

May 31st 2018

$28.5bln

-$9.4bln

$18bln

-0.1%

Jun 30th 2018

$30.5bln

-$18bln

$18bln

0.4%

Jul 31st 2018

$28.5bln

-$24bln

$24bln

Aug 15th 2018

$23.1bln

-$12.6bln

$24bln

Source: Federal Reserve

USD TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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