Euro Short Positions Expensive as Rates Spike into Month-End, Holiday

Why are Euro Rollover Rates so High?

The end of the month has produced a sharp jump in overnight interbank lending rates (LIBOR) in Euros, and the fact that today sees rollover charges/credits at four times their normal rate magnifies the effect.

Data source: British Banking Association

Indeed holding a Euro/US Dollar short position on the interbank market has become almost four times more expensive than it was yesterday. The chart below shows funding conditions are now at their most stretched since the surge we saw into the end of the first quarter.

Source: Bloomberg Generic Price - “Consensus” Pricing

Understanding Forex Rollover

Trading forex on leverage involves borrowing one currency in order to purchase another. In effect this means traders will pay interest rates for the currency which they sell, while they receive interest rate payments for the currency which they buy. In FX terminology this is most often called “Rollover” or “Swaps”.

Overnight interest rates will guide whether the trader will ultimately pay to hold a position or earn interest on the trade, and any sharp changes in the supply or demand for a specific currency can shift overnight interest rates in a hurry.

This dynamic can be very seamless to the trader, and indeed the parent company of DailyFX in FXCM Inc. posts the Rollover rates for both “Buy” and “Sell” orders directly on their trading platform.

Read more on forex rollover on FXCM.com

End of the Month Spike in Interest Rates Combines with 4x Rollover Day due to Holiday

We often see such sharp supply and demand imbalances at important dates in the calendar year—namely months, quarters, and years. In this case the jump in rates coincides with the end of the month of April, and the fact that May 1 is a holiday across the Euro Area means that the weekend rollover charges/credits will be paid or charged on a single day.

Traders should note that this means interest rate charges/credits will be far larger than normal for holding Euro short positions.

It is likewise important to point out that we are in the middle of Japan’s Golden Week—a series of holidays at the end of April and through early May. Though forward rates are thus far relatively normal, traders should take note of our Rollover Calendar and the holiday schedule for JPY pairs.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com