Citi flags a risk of a sharp rise in net USD demand over coming weeks, which may result in rising USD liquidity premiums and a subsequent spike in USD against its counterparts.
"Investor focus shifts to the prospect for a potential broad based tightening in the year-end USD liquidity premium following the NY Fed’s update on its money market operations schedule. More recently after September end, USD liquidity premiums have been shrinking on expectations that the Fed will likely be able to adequately supply USD funding to year-end," Citi notes.
"However, major bank money market desks in NY are anticipating a sharp rise in net USD demand over coming weeks to year-end and the investor focus is turning on whether the NY Fed’s schedule may be enough to cater for the anticipated demand. Should the Fed fall short, this may result in rising USD liquidity premiums thereby leading to a spike in USD in the FX space," Citi adds.