FX Daily: Use Of Dollar Swap Lines Falls Sharply

Access to USD wholesale funding markets has reopened, which is a good sign. But the challenge for FX markets this week will be the daily swings in new US virus cases.

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USD: Central bank use of USD swap lines falls sharply

Getting quite some attention over the last few days has been the sharp decline in use of Fed USD swap lines. Recall 14 central banks around the world have access to USD funding via these lines, typically via 7 day and 84-day operations. Use of this effective emergency facility peaked at $449bn in late May but has since slumped to $279bn – which is a good sign that access to USD wholesale funding markets has reopened. FX markets start the week in quiet function and perhaps the challenge this week will be whether markets can take the daily swings in new US virus cases in stride. The US calendar is relatively quiet this week and one additional event risk bears mentioning. The Fed on Thursday afternoon publishes the results from its Dodd Frank Act stress tests and the related Comprehensive Capital Analysis and Review (CCAR). Any suggestion that these 34 banks under review need to hold more capital or will have more limitations placed on them in terms of ability to pay dividends and buyback shares could upset the stock market. DXY has outside risk to the 98.15/25 area this week.

EUR: Waiting on the EU recovery fund

It seems there was little progress on the EU Recovery Fund at last week’s EU summit, but the hope is that EU leaders will meet in person mid-July to secure a deal before the end of that month. EUR/USD continues to gently hand back early month gains and a break of the 1.1160/1170 area could see the correction extending to the 1.1100 area. The European data calendar today sees the June eurozone consumer confidence figure, where a good bounceback to the -15 area is expected.

GBP: Socially distant

The UK focus switches to whether the government narrows the current restrictions on social distancing (2m) and offers a temporary VAT cut to help businesses. Measures are expected to be announced tomorrow. GBP is in the doldrums, however, and a large options expiry at 0.9060 could drag EUR/GBP into 16CET today.

AUD: Lowe says the AUD is not overvalued

On the list of challenges to the recovery in commodity currencies is the risk of local central bankers trying to talk their currencies lower. Reserve Bank of Australia Governor Philip Lowe, therefore, surprised today by saying that the Aussie dollar was not overvalued and the recent rally was justified. As a very high beta currency, the AUD faces many external challenges over coming months, but it seems the threat of verbal intervention to weaken the currency is slipping down the risk of possible threats.