Fx forwards liquidity
For g10 fx, how does the liquidity of imm date forward compare with 1m forward?For 1m forward, do people trade month end rolling or roll on a daily basis?Thanks.
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Also, would like to compare the liquidity of end of month forwards with imm date forwards.
Hi sj855 - if you talk about G10 ccys only then IMM roll will be quite liquid. This is because a lot of the IMM flows going through the mrkt is a function of equity house hedging their currency exposure, i.e. RHS flows, or rolling their long currency position, i.e. LHS flows. There are also spec flows that may impact the IMM prices. 1m forward points will be more liquid than IMM generally speaking as it is a "given" tenor if i may say it like this that you can easily see on screens, quoted in runs through brokers, etc.
Regarding your second question on the 1s fwd - you roll your currency at expiry which will depend on the day of the trade. A 1s fwd does not end EOM, it end spot+1m following business day convention. For instance, if you want to trade a 1m EURUSD fx swap value spot and the trade date is on the 08th Sep for instance, then the maturity date will be the 10th October (again, assuming 10th oct is a good business day - otherwise you use the next good business day). Given an investor / mrkt participant which originally dealt a RHS fx swap in 250mio EURUSD spot-1s then on the 08th october, if they want to keep their hedge in place, they will do another RHS fx swap spot(10oct)-1s.
Then of course, you can take into account the currency you are selling near leg and what to do with it. If we take our precedent example:
An investor is Selling and Buying EUR 250mio ag USD @ Y (swap pts) spot x 1s - now if the investor already is long EUR, they dont have to worry about this short EUR position on the near leg (remember they sell EUR and receive USD value spot). In case they dont have the EUR, then the question is how they finance this short position over the lifetime of the trade. Most people will roll it T/N (tmr / spot). But you can go into further analysis and use this to do some RV trades / funding trades / macro view etc.
Happy to provide more details if you need.
PS : this is my first answer on WSO although i have been on the website for quite a nbr of years so if my answer is not the clearest, feel free to let me know.
sj855 To also provide an answer to your second post regarding the difference in liquidity between EOM forwards and IMM swaps.
I am not sure about G10 desk practices but on an EM desk you would have both IMM fx swaps and ME-ME (month-end / month-end) fx swaps requests coming through. I see more IMM flows going through than ME-ME as IMM dates are indexed on futures expiries so there is a certain solid rationale for dealing IMM. Regarding ME-ME trades, I have seen those flows coming from accounts knowing more than I do and trying to pick on me :) Same happened on the Fixed Income side where some people will do some IRS dates switch where if you don't price accordingly whether the fixings you are gonna pay happen Beginning of the Month or End of Month, you are gonna bleed money on each fixings across the lifetime of the trade and it will be too late before you realize it..
Never forget the rationale of people engaging into FX transactions. People use IMM because they are indexed on futures dates so it's easy to handle things if FX is not your primary concern. But for others, I don't care about IMM, I just want to be long some commercial paper from spot to 1m and that's it.
Overall, I would reckon IMM would be more liquid compared with pure EOM date as the EOM date would be a given tenor (30th or 31st of the next month for a 1s) only on 2 days. But between a IMM and a regular 1s - liquidity in the 1s will definitely be better.
Cheers
When you think
Do you have mandate to trade short term rates product other than fx swaps and government bills?
Hi @Dawg-nuts - it would depend on the desk itself (G10 or EM - and then if EM, depending on the EM region) and on the bank's approach in terms of risk. Most FX desks (up to 2Y tenor) would be allowed to have some rates risk in the book so this would imply they could trade basis, FRA, or even IRS on top of MM products to a reasonable extent (again, depending on the bank). But the fact that you can deal those doesn't mean that you *must* trade them. If you run a fx swap book on EM Asia currencies, your goal is not to create PnL swing with $ rates although you are most likely allowed to trade them. There's a reason why a STIR fx desk will not see the flows of a US swap rates trader focused on the 2Y and below tenor, why the Basis desk will see the EURUSD xccy swaps but the STIR desk will see the regular fx swaps, etc. The trading book should make most of the PnL based on the standard expected products that the desk will deal on a day-to-day basis with the franchise. I don't deal a eurusd spot with the FXO desk although of course they deal spot for delta purposes, I deal a eurusd spot with the spot desk. This is based on my personal exp. so people out there from different backgrounds / banks could have a different view to things. The mandate / authorization to trade a larger scope of products is meant to help mitigate some residual risk exposure or to allow the desk to be able to price client requests without asking for approvals all the time. Example : if i run a EM ccy fx swap book and a client comes to do a 2Y FX-linked note, there is a good chance the funding leg of the note will be floating so that implies a rates risk. The FX desk should have the ability to take onto this risk in the book because they are the ones quoting FX up to 2Y on this particular currency - no need to involve the LongTerm FX / Basis desk. This does not mean however that the FX desk should go around dealing in rates - it simply allows them to run the business as usual and to keep a residual exposure without changing the nature of their book / day-to-day business. Hope this answers your question
Thanks
The LHS flows you mentioned before are short term outright punts on the direction of the FX right? Ie betting em fx to rally.
Also with regards to the fx linked note, how often do you see this type of flow? The risk is managed by your em fx desk? Or is it managed by the structured trading desk but faces you internally for the hedge? Thanks
Hey - I was talking in terms of fx swaps before to be honest but the same rationale applies to what I said since a forward / outright is simply a spot + fx swap. And if you want to roll your outright position, you would use a fx swap.
Re the FX-linked note, we see some regular flows on this product with clients always looking to earn the carry from EM currencies on an outright basis - i.e. selling USD / buying EM currency forward. If there isn't any non-linearity in the trade then my desk would take care of it and that is always the case on the currencies we deal. In case there was some non-linear aspect to the trade due to some options being embedded in the note, we would indeed let the structured trading desk handle it and do the hedge only.
Thanks @Scapinetto. Suppose I have a strategy on EURUSD, which trades daily, and I use 1m EURUSD forwards as the trading instrument. For instance, buy 1mm on Oct 11, sell 2mm on Oct 12, sell 1mm on Oct 13, buy 3mm on Oct 14. By Oct 14, my portfolio would have ended up having four 1m forwards with different value dates. If I continue, it would have even more instruments in my portfolio. So in practice, what are some of the efficient ways of managing such a portfolio, especially starting from 1 month time, these forwards will sequentially mature? Thanks again.
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