USD Analysis and Talking Points
- Federal Reserve Balance Sheet Unwind to Lead to Net Negative Liquidity Impact of $12.6bln
- 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 31st) from the most recent SOMA (System Open Market Account) redemption (Jul 2nd), the USD gained against its major counterparts. Today marks the next redemption day in which the shrinking Fed balance sheet will lead to a net negative impact on US liquidity by around $12.6bln.
| 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 | 0.5% |
| Aug 15th 2018 | $23.1bln | -$12.6bln | $24bln |
Source: Federal Reserve
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 0.36% with a hit ratio of 80%. Consequently, this could see the Euro extend on losses today with the mild support seen at 1.1300-10. A firm break below will likely put the pair on a run towards 1.1190, which marks the 61.8% Fib of the 1.0340-1.2555 rise.
EURUSD Price Chart: Daily Time Frame (March-August 2018)
USD TRADING RESOURCES:
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--- Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.mcqueen@ig.com
Follow Justin on Twitter @JMcQueenFX
