Currency Forwards

[Lyapunov]

When <local currency>/USD FRAs decline, does this always imply USD weakness w.r.t. the cross?

A little clarification would be appreciated.

 

[Martinghoul]

When you say "<local currency>/USD FRAs decline", do you mean "the spread declines"?

 

[Lyapunov]

When you say "<local currency>/USD FRAs decline", do you mean "the spread declines"?

I mean forward curve inversion, e.g. O/N to 1Y.

 

[forker]

It depends on what curve are you referring to. Is it comprised of only interest rates or a mixed bag such as swaps, eonia

 

[Martinghoul]

I mean forward curve inversion, e.g. O/N to 1Y.

Here you're referring to the FX fwds, I assume? 'Cause I can't imagine what you might mean by a O/N FRA...

You need to formulate your question more clearly, I am afraid, 'cause it currently doesn't make a lot of sense.

 

[scose-no-doubt]

I think he means when X currency/USD FRAs decline does it imply weakness in the spot.

S'abit cyclical really?

 

[forker]

I think he means when X currency/USD FRAs decline does it imply weakness in the spot.

S'abit cyclical really?

That makes more sense, can't think of a reason a retail trader would need a curve

 

[Martinghoul]

I think he means when X currency/USD FRAs decline does it imply weakness in the spot.

S'abit cyclical really?

OKI, can you pls explain to me what a X currency/USD FRA is?

 

[scose-no-doubt]

any currency vs usd forward rate agreement? That's what I assumed anyway.

 

[Lyapunov]

Sorry for the terminology confusion. I used the term "FRA" (inaccurately?) in reference to the forward rate that is specified in a contract to exchange a currency in the future.

I think he means when X currency/USD FRAs decline does it imply weakness in the spot.

S'abit cyclical really?

Yes, this is what I am referring to. When X currency/USD FRAs decline, does it always imply spot weakness?

I want to understand the mechanism at work here.

 

[scose-no-doubt]

Well if you consider that the forward is just a discounted spot then the same fundamental strengths and weaknesses will be in play at any point on the curve so to speak. The spread or difference will stem from the discount factor and the opportunity costs components therein. You're basically looking at a reflection of interest rate curve through fx I think. I'm sure Martinghoul will be along to set me straight here.

 

[Martinghoul]

any currency vs usd forward rate agreement? That's what I assumed anyway.

There's no such thing... There are FRAs that trade in each ccy, but they trade independently.

When you trade FX fwds (aka FX swaps), you will be trading a forward exchange rate. That rate is driven by the interest rate parity relationship. That is what the OP is referring to and that's not really related to FRAs. Sometimes people use the term "forward points" or just "forwards".

So, in answer to the original question, the fwd can decline not just because of the spot moving, but also because the pricing of the expected relative interest rates in the market has changed. For instance, you could see this occurring recently in EURDKK.

 

[scose-no-doubt]

When you trade FX fwds (aka FX swaps), you will be trading a forward exchange rate.

Swat I (we?) meant. Terminology failed me there lol.

 

[NVP]

could you trade the differentials ?

a bit like the differentials / spreads on 3 year vs say 10 year bonds ?

N

 

[scose-no-doubt]

What you mean bet on the curve tighenting/flattening in one country vs another? That's just two trades innit?

 

[NVP]

What you mean bet on the curve tighenting/flattening in one country vs another? That's just two trades innit?

yep - that as well..............

I've been considering the (intra) European bond market as it looks sometimes a lot easier than forex at times going spain/italy / Portugal etc etc vs the germanbund

but I know Feck all about it so I stay away ...probably best

N

 

[scose-no-doubt]

Well the PIGS/Bund spread normalising is the euro recovery trade without further haircut trade innit? I wouldn't be touching that lol.

 

[Martinghoul]

Yes, you can trade all these things... Spreads of all sort, FX fwds, yada-yada.

 

[scose-no-doubt]

How come spanish auction is so covered MG? Who is on the bid?

 

[Martinghoul]

How come spanish auction is so covered MG? Who is on the bid?

The more appropriate question is who isn't... In actuality, today's auction results were sorta mixed. Most of the time, it's the domestics (banks, mainly) who dominate these auctions.