I have had a few people talk to me about their brokers’ scamming them out of their rightfully earned interest. With the help of Bloomberg and DailyFX I bring you a quick short article that should answer all of your questions.
The currency market has recently been struck with adverse Bid/Ask spreads and unfavorable interest rate rolls stemming from evolution of a global financial crisis. Indeed, the lack of liquidity in today’s very volatile market place has made it difficult to assume leveraged positions. More succinctly for FX traders, the drop in market liquidity has led to the recent spike in overnight borrowing rates. In turn, this has led to tight or even negative interest rate rolls for many pairs at the interbank level. In reality, rollover in the Forex Market reflects more than just the benchmark interest rate differential between two currencies; and the true spread between accessible borrowing and lending rates helps us to understand why one trader could have to pay rolls even if he holds a long position in the highest yielding currency. Looking ahead, financial markets are likely to remain under a considerable stress; but the recent injections of liquidity by the world’s preeminent central banks and efforts to improve policy should help to alleviate some pressure in the financial system over time.
Money market difficulties are quite visible in overnight borrowing and lending rates, as dealers make it prohibitively expensive to hold positions that they view risky to their own operations. In fact, US Dollar Overnight London Interbank Bid Rates, or the rates at which banks are willing to bid for overnight borrowing from other banks, skyrocketed over 400 basis points in the span of a single day. Such a dramatic move underlines banks’ unwillingness to lend to each other and the true scarcity of such funds.
So what does this mean for me as a Forex Trader?
Traders will see the effects of sky-high London Interbank Bid rates on interest rates charged and collected on leveraged forex positions. If major bank are unwilling to lend to each other, they will make it prohibitively expensive for forex traders to borrow US dollars or any other currency—sending funding costs through the roof. At the same time, those same financial entities will pay relatively little on margined currency positions in which the trader is due to receive interest payments, and the end result is that margined forex traders may be forced to pay interest on either side of the market in even the most high-yielding forex pairs.
Interbank market illiquidity likewise translates into higher transaction costs for the forex trader, as banks’ unwillingness to take on risk means that they are likewise unwilling to act as counterparties to forex traders. Given more pressing needs elsewhere in their businesses, many financial institutions have pulled the plug on their forex dealing desks, and the result is less competition in setting bid and ask rates in even the most historically liquid forex pairs. Illiquidity only exacerbates market volatility, as less liquid markets are more prone to sharp price fluctuations.
Conditions in forex trading markets may continue to worsen if we do not see marked improvement in global liquidity; the main risk to the forex trader is that banks remain unwilling to provide funds in interbank forex dealing and credit markets.
Ok, so until banks stop collapsing and normal liquidity returns you may have to face sudden changes or deal with negative dealing swap for both long and short positions. InterbankFX today changed the rate of Aud/Jpy giving notice that it is effective immediately. InterbankFX DID have the courtesy to at least send this message out less than an hour AFTER the days swap/rollover had been calculated. Giving a trader almost a full day to clear our and avoid negative swap.
I hope this helps you all. Trade Smarter and no harder, there are reasons that everything is happening. Don’t be ignorant and ignore the truth about the global crisis we are witnessing, it IS effecting our trading whether you like it or not.
Good Luck and Happy Trading.