Holding Euro Positions May Get Expensive as Overnight Rates Spike

What’s happening to Euro interest rates and why does it matter to traders?

The end of the trading quarter means that demand for borrowing some major currencies has risen sharply, and interbank lending rates have shifted dramatically—particularly for Yen and Euro pairs.

In fact forward rates show that holding a Euro/US Dollar short position may cost a trader nearly 30 times more than the same position held on Thursday. The end of the fiscal quarter in Japan will likewise make borrowing the Japanese Yen quite expensive. Why does this represent an important risk and how might we take advantage?

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 Quarter Means Euro Demand Surges, Japanese Fiscal Year End Makes JPY Expensive

We often see such sharp supply and demand imbalances at important dates in the calendar year—namely months, quarters, and years. These are the times in which many borrowers or lenders must settle major positions, which may involve buying back or selling significant amounts of a specific currency.

Traders should note that this means interest rate charges/credits will be far larger than normal for EUR and JPY pairs. This does represent a potential opportunity: traders may receive the higher Euro interest rate if they buy the currency into the New York close. For the JPY this means that those short the Yen (e.g. long USDJPY, GBPJPY) will receive lower interest rate payments than normal.

For those short Euro in particular they should note that said position may become quite expensive. Caution is urged ahead of the weekend as interbank lending rates spike.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com