J.P.Morgan: A Volatile Week For Year-End Turn Pricing

J.P.Morgan note that "year-end turn pricing in FX swaps has undergone a nearly full round about trip in recent weeks, having moved initially towards pricing greater dollar stress, and unwinding much of that move in the last few days

• Recent public comments related to GSIB score management have likely been the culprit driving the most recent price action, which now suggests at least two large U.S. dealers are likely to allow their scores to move into a higher band relative to last year
• The remaining GSIBs, constituting roughly 70% of intermediation in FX swap markets, are less likely to follow suit given a smaller deviation from baseline by comparison. Which combined with the continued increase in bank reserve balance owing to ongoing Fed asset purchases and likely declines in the TGA means regulatory constraints are still likely to bind on liquidity provision at year-end.
• Moreover, even those banks moving temporarily into higher buckets will not necessarily lend unencumbered, and current FX/OIS basis levels means swaps are likely a less attractive place to deploy excess GSIB slack compared to other markets.
• While additional liquidity is still in principle available via the Fed's FX swap facility, those funds are delivered through the local banking system and therefore are subject to intermediation costs, not to mention potential stigma associated with accessing that facility.
• While near-term momentum is clearly skewed towards short-term cross currency basis pricing out dollar premia, our core view remains, and we continue to recommend received positions in 6M CHF/USD cross currency basis."