The FX markets continue to show significant volatility. What is the impact of USD liquidity on these markets?
Here is their view, courtesy of eFXdata:
Citi Research discusses the current conditions of the USD liquidity and its impact on FX markets.
“The concern does not appear to be how much USD liquidity the Fed may be supplying overall but how such liquidity is being distributed. Looking offshore, both the BoJ and ECB have taken up sizeable USD liquidity by utilizing their swap lines with the Fed….Domestically, however, access to USD liquidity by small to medium sized US corporates still seems strained with the US corporate debt market continuing to show signs of significant stress,” Citi notes.
“Bottom line – There seems to be adequate USD liquidity provisions by the Fed to meet offshore demand and interbank funding needs but it is the US small to medium sized corporate sector that remains under liquidity stress that is leading to the liquidity squeeze and unprecedented gains in USD.
Much now depends on the US Treasury’s 3rd stage of its fiscal stimulus plan. Measures to backstop the Fed to deliver credit to US small and medium sized domestic corporates could see USD reverse its current gains but until that time however, FX markets would likely continue to see elevated volatility and USD gains,” Citi adds.
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