CME Unveils FX Swap Rate Monitor

CME Group has introduced the CME FX Swap Rate Monitor a new tool which 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, which is a spread between the OTC FX spot and FX futures.

The new tool will be available for eight currency pairs, namely the euro, yen, sterling, Australian, Canadian and New Zealand dollars, the Swiss franc and Mexican peso against the dollar, and creates market intelligence that helps identify opportunities, which traders can use to identify potential areas of underperformance or investment opportunities. As an example, CME says points to the differential between euro and US dollar yields in mid-January 2020.

This stood at 2.12%, however 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,” CME says. “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.”

The Merc acknowledges that the numbers are based on mid rates and therefore represents an overly simplified example, but it says 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.

A summary view is offered that allows users to evaluate the current implied interest rate differential and corresponding FX Link and FX futures data for the first three available expiries, for all available pairs. A current view view allows users to evaluate the current implied interest rate differential and a history of the rate differential at the point in time when the FX Link spread was approximately equivalent to a three month, two Month, and one month swap, for the first 3 available expiries (data will only be populated if the time to expiration has reached a 90, 60, or 30-day threshold).

A third view, the historical data view allows users to evaluate the progression of the  implied interest rate differential and corresponding FX Link and FX Futures data for a given currency pair and the first three available expiries. Selecting a given expiry will populate the table with the implied rate differential historically reflected in the market across all pairs in FX Link, including the relevant FX Link and FX Futures market data for the period of time when the contract was available.

Colin Lambert

Share This

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on reddit

Related Posts in ,