FX swaps: the biggest market most scalpers never hear about

[Shadow Trader]

Spot trading attracts the attention, but the largest part of daily turnover is the FX swap, a pair of transactions that exchange currencies now and reverse them later.

Banks and funds use swaps to borrow one currency against another, and to roll positions. The price of a swap reflects interest rate differentials and funding pressure.

Retail traders see the effect through swap rates, the overnight charges or credits on open positions. Those figures derive from the forward points in the swap market, plus the broker's markup.

At quarter-end and year-end, funding pressure can distort swap pricing. Cross-currency basis, the premium paid to borrow dollars against another currency, widened sharply in 2008 and again in March 2020, when central banks opened swap lines to ease the strain.

For spot scalpers, the lesson is that currency prices sit atop a funding structure. When funding stress appears, spot behaviour often turns erratic.

Has funding stress ever shown up in unusual price behaviour while trading here?

[Amanhasnoname]

I only started paying attention to this after March 2020, when the dollar did something I could not explain from the news. EURUSD was swinging more than a hundred pips in an hour and the moves did not line up with any headline I could find. A colleague who worked on a bank funding desk told me later that dollar funding was the real story that week and spot was just reacting to it.

The place I still notice it is around quarter ends. On the last couple of days of March, June, September and December, the overnight charges on my account sometimes jump, and spot on the yen crosses can get jumpy in the late New York session for no obvious reason. I keep my size smaller on those days.

I do not try to trade any of this directly. For me it is more of a warning sign. If swap rates on my platform change sharply overnight, I take it as a hint that the market under the market is under some strain, and I trade more carefully.