Dollar demand something to potentially keep an eye on over the next few weeks
Will dollar buyers do their Christmas shopping early again this year?Adam's post on the funding squeeze in the short-term market prompted me to revisit this topic i.e. dollar demand once again, which often is a talking point towards the year-end.
It's one of those seasonal plays and what not as you tend to see heightened dollar demand going into November and December before the year comes to a close. The EUR/USD 3-month cross currency basis swap tends to give a good indication of that:
In 2015-2017, the demand typically kicks in around the end of November - whereby you'll see shortages in the dollar - thus the basis swap falls. At times, the flows may be blurred when offset against other macro trends in markets but it is evident that they still exist.
Last year though, it wasn't really the case. The funding demand seemed to have kicked in around late September through October and the typical rush for dollars in the final few weeks of the year were not to be seen.
Will something similar play out again this year? There's no exact science to the flows and the theory here - as mentioned earlier, other macro trends in markets can help to override the effects - but it is just something that we as traders should be aware of.
Most of us don't even consider stuff like this into our trading calculations but it is always best to have more information than less, even if it means just keeping them in your back pocket - in case it does come in handy.