What it calculates: : The CME FX Swap Rate Monitor calculates the implied interest rate differential for eight currency pairs using tradable pricing data from CME FX futures and the FX Link central limit order book.
What it creates: The tool creates market intelligence that helps identify opportunities, which traders can use to identify potential areas of underperformance or investment opportunities.
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CME FX Link is the first-ever electronic spread between OTC FX & FX futures, traded as the differential between FX futures and OTC Spot FX. It involves the simultaneous execution of an FX futures contract and an OTC Spot FX transaction – enabling participants to hold forward exposures via a futures contract and in turn, free up credit lines, by accessing the cleared and netted exchange model.
Market makers managing OTC and listed FX inventory, FX swap traders, and buyside firms rolling OTC swap positions into futures are attracted to CME FX Link for the ability to trade passively, optimize and obtain best execution. The trading activity of these participants creates the intelligence behind the CME FX Swap Rate Monitor.
In mid-January 2020 yields on short term government bonds in the US and Europe were as follows:
The differential between the two yields is 2.12%.
At the same time, the CME FX Implied Rates Monitor, using mid-market pricing from EUR/USD in CME FX Link indicated that the interest rate differential implied by the FX futures market was approximately 2.19% for the Mar-2020 futures expiry. This, therefore, implied a yield enhancement of 7 basis points. That is to say, a US investor could get a pick up of 7 bps in yield by purchasing a similar duration Euro government security and hedging the resulting FX exposure via a synthetic FX swap using CME FX Link.
Given that these numbers are based on mid rates this is an overly simplified example, but it helps to illustrate how the CME FX Implied Rates Monitor can be used to identify potential yield enhancement opportunities. In practice, other considerations such as overall transaction costs also need to be considered as these would directly impact upon the potential returns available.
Get to know the active underlying market by following the volume in each currency pair below, or see them all: