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USD: Game changer – Nordea Markets

Analysts at Nordea Markets suggest that with the US Treasury being forced to bring down its cash holdings at the Fed ahead of 1 March, when the current debt ceiling suspension runs out, the course for excess USD liquidity will most likely be at least temporarily changed.

Key Quotes

“Currently the US Treasury holds around 400bn in liquidity at the cash buffer at Fed. This cash buffer will be brought down by at the very least 200bn already 1-1.5 months ahead of the March 1st deadline. Politicians usually never strike a deal in such good time, why we consider this technical liquidity addition a high probability event.”

“This could be a game-changer (at least temporarily) for the USD, risky assets and potentially also EM, as scarcer USD liquidity has likely been a co-culprit behind a strong USD, weaker risky assets and struggling emerging markets.”

“The Q1-2019 market action may hence look reminiscent of Q1-2017, when the US Treasury also held a large cash buffer heading into a debt ceiling suspension deadline. In 2017, LIBOR-OIS tightened (as a result of less bill issuance) and the USD weakened as a consequence. We would not be surprised to see something similar happening this year.”