There is no shortage of US dollars ahead of December, unlike previous years
Year-end demand for the greenback is often a touted reason for the dollar to hold steady as the year winds down. But with the market already mostly long on the dollar for the entire year, does that take away some need for dollar funding as we close out the year?
Evidently, there is some backing to that theory. On most years, dollar demand usually kicks in towards the year end and we see a dip in EUR/USD cross-currency basis swap as a result. That means that there is a shortage of dollars in the market as market participants i.e. banks and financial institutions start seeking them out.
However, the run up to December this year appears rather different with dollar funds seemingly in abundance as the basis swap rises sharply over the past two weeks after having bottomed out a little in October and early November. That begs the question, did the year-end dollar demand kick in early in 2019?
Not many people are a firm advocate of using basis swaps in trading and I for one usually take it with a pinch of salt too. But having more information is always better than coping with less, and this is something to keep in mind in trading the last few weeks of the year in any case; especially when liquidity begins to dry up in the final month.
