Forex market conditions have seen a short-term improvement, as a sigh of relief across global financial markets eases tensions and returns much-needed liquidity to traded markets. News that the US Treasury plans to buy up troubled debt from private companies played a large part in a massive recovery in financials, while the Securities and Exchange Commission’s ban of short-selling in financial stocks likewise boosted downtrodden equity markets. The net result is that liquidity has improved substantially across traded assets, and we have quickly seen bid/ask spreads improve in major forex pairs.
Though markets have hardly escaped difficult conditions altogether, we already see significant improvements in overnight lending rates and other key measures on the interbank lending level. US Dollar Overnight London Interbank Offered Rates, or the rates charged for overnight lending between banks, have fallen over 300 basis points in four days. Though these numbers remain significantly above the equivalent risk-free rates, we finally see signs of improvement in clearly distressed interbank markets.
What does it mean for the forex trader?
If money markets and general liquidity continue to improve, this will translate into lower bid/ask spreads and more favorable overnight borrowingrates on margin forex positions. Already we see that implied volatility rates on options have eased from their recent heights, and a further easing would signal that markets are pricing in favorable forex trading conditions through the near term.
Will Forex Trading Conditions Continue to Improve?
As forex traders, we will subsequently watch spreads between US Treasuries and their equivalent interbank money market rates to gauge the level of confidence in financial markets. Already we see a fairly substantial improvement overnight, but the difference between money market and risk-free government rates remains at historic levels. We will continue to monitor this key barometer for credit market health. Until markets return to normal, traders should
Written by David Rodriguez, Quantitative Analyst for DailyFX.com
To contact the author of this report, e-mail drodriguez@dailyfx.com
Forex Trading Market Conditions Improve on US Treasury Plans
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