No bumps in the road
The first three weeks of December were characterised by a heavy data and central bank schedule. Last week saw multiple G10 central banks release their latest monetary policy decisions following the release of economic data in the sessions prior. The government shut down earlier this quarter did little to help the density of the economic calendar in December. That flurry of data now unsurprisingly calms down with very few planned data releases that are likely to upset current valuations amongst key FX pairs ahead of year end.
Accordingly, we have likely already seen much of the 2025 year-end position adjustment flow come and go with relatively good order maintained across markets. One of the key remaining risks that can catch participants out this time of year comes from year-end points. When we talk about year-end points we are talking about the difference between the rates for delivery of key pairs between the last trading session of 2025 versus the first of 2026. In this case, for most currency pairs at least, 31st December versus 2nd January. Usually, as a result of a demand for US Dollars for cash flow and balance sheet reduction purposes, the cost of borrowing dollars skyrockets over year-end.
It’s not just a one day thing, subject to Dollar funding constraints in the market through the year asymmetries in key pairs could build up weeks months and even years in advance. Currently FX volatility is on a downtrend once again but the risk adjustment caused by last week’s flurry of economic data and central bank decisions could limit liquidity moving into year-end. Therefore, as always, to avoid year-end surprises it’s best practice to get those deliverables over the year-end period hedged where there is a time sensitivity. Points so far remain within a basis-point or two of normal with bid-offer spreads relatively well contained.
Discussion and Analysis by Charles Porter
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