EURUSD to Extend Losses on Today's Federal Reserve Balance Sheet Unwind
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EURUSD to Extend Losses on Today’s Federal Reserve Balance Sheet Unwind

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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 $6 bln/month a nd working up to a maximum of $5 0 bln , in order to unload the $4.5 tln 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 31 st ) from the most recent SOMA (System Open Market Account) redemption (Jul 2 nd ), 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 31 st 2017 $8.7bln -$6bln $6bln 0%
Nov 15 th 2017 $11bln -$3.5bln $6bln 0%
Nov 30 th 2017 $7.9bln -$2.5bln $6bln -0.1%
Dec 31 st 2017 $17.5bln -$6bln $6bln 0.1%
Jan 31 st 2018 $27.6bln -$12bln $12bln 0%
Feb 15 th 2018 $16.6bln -$4.1bln $12bln -0.6%
Feb 28 th 2018 $32bln -$7.9bln $12bln 0.3%
Mar 31 st 2018 $31.2bln -$12bln $12bln 0.1%
Apr 30 th 2018 $30.4bln -$18bln $18bln 0.3%
May 15 th 2018 $26.2bln -$8.6bln $18bln 0.7%
May 31 st 2018 $28.5bln -$9.4bln $18bln -0.1%
Jun 30 th 2018 $30.5bln -$18bln $18bln 0.4%
Jul 31 st 2018 $28.5bln -$24bln $24bln 0.5%
Aug 15 th 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:

--- Written by Justin McQueen, Market Analyst

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

Follow Justin on Twitter @JMcQueenFX

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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