Markets: Why are foreign central banks allowed to tighten USD liquidity? – Nordea Markets
Nordea Markets analysts continue to believe that dollar scarcity is a key driver of markets, be it the effective Fed Funds rate or the foreign exchange market.
Key Quotes
“While the Fed is mulling a standing repo facility (SRF) getting such a program up and running could take a year or even more (it took 14 months to get the ON RRP up and running), so maybe it’s not that much to get excited about.”
“But what if the Fed wants to do something to ease liquidity conditions already in July? It could decide to start buying US Treasuries imminently, which would grow bank reserves and ease dollar scarcity. While possible, the FOMC has said it plans to hold the size of its bond portfolio roughly constant for a time. Thus, starting UST purchases already in July is likely too much to hope for.”
“No matter why, the Fed could limit foreign official accounts access to the Fed’s repo pool if it wants to: “the New York Fed may choose to limit the overall size of, or individual account participation in, the foreign repo pool based on other factors”.”
“Such a move would boost availability of reserves in the banking system and, as a side effect, force foreign official accounts into buying other assets (Treasuries – perhaps helping to normalise swap spreads?) or step up their lending to the private sector. It might also be negative for the dollar via a rise in bank reserves.”
“In the bigger picture, we note that foreign official accounts repo lending to private counterparties has never recovered from the collapse during the global financial crisis.”
Author
Sandeep Kanihama
FXStreet Contributor
Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.
