Accessible version Global Rates Viewpoint FX-Sofr primer: 2026 edition Primer Key takeaways Structural changes in relative liquidity The global liquidity outlook is changing as global central banks part ways on balance sheet management. In the US, the Federal Reserve stopped quantitative tightening (QT) and is increasing its balance sheet via bill purchases. In the UK and Japan, the Bank of England and Bank of Japan are reducing their respective pace of QT. In the euro area, the European Central Bank remain ...

Core Insights - The 2025 Triennial Central Bank Survey indicates a significant increase in trading activity in FX and OTC interest rate derivatives markets, with FX trading reaching $9.6 trillion per day, up 28% from 2022, and OTC interest rate derivatives increasing 59% to $7.9 trillion daily [1][2]. FX Market Overview - The US dollar remains the most-traded currency, involved in 89% of all FX trades, followed by the euro at 28.9% and the Japanese yen at 16.8%. The share of sterling decreased to 10.2% [3]. - FX swaps are the most traded instrument, with average daily turnover rising to $4 trillion, a 5% increase from April 2022. FX spot trading increased by 42%, while outright forwards rose by 60%, with their shares in global turnover reaching 31% and 19% respectively [3]. OTC Interest Rate Derivatives - Average daily turnover of euro-denominated contracts nearly doubled to $3.0 trillion, accounting for 38% of the global total, while US dollar contracts increased by 7% to $2.4 trillion, leading to a decline in the international share of US dollar contracts to 31% [4]. - In contrast, the market for exchange-traded derivatives shows US dollar contracts holding 65% of global turnover, with significant increases in turnover for sterling and Japanese yen derivatives, surging by 179% and 684% respectively [5]. Trading Centers - FX trading remains concentrated in major financial centers, with the UK, US, Singapore, and Hong Kong SAR accounting for 75% of overall foreign exchange trading [5]. - The UK is the most important FX trading location, maintaining a 38% share of total turnover, while for interest rate derivatives, the UK and US together hold 73% of the market [6][7].

Investment Rating - The report maintains a "Long" position on 3-year Chinese Government Bonds (CGB) in anticipation of dovish policy tailwinds from the People's Bank of China (PBoC) [2][28]. Core Insights - Chinese corporates are lagging in de-dollarization efforts, with a notable increase in net USD selling by exporters in May, but this was primarily due to reduced outright USD buying rather than increased selling [3][11]. - The PBoC's fixing strategy has shown a more measured pace in the recent decline of CNY FX compared to previous sharp DXY weakness, indicating a preference for FX stability [4][20]. - Structural demand for foreign assets by Chinese investors is driven by a search for yield amid a domestic shortage of investable assets, leading to a shift in interest towards less liquid bonds [28][30]. Summary by Sections Current Trade Recommendations - Long 3-year CGB (FX-hedged) initiated on March 7, 2025, with a current yield of 1.39% and a profit of +14 basis points [2]. CNY FX and De-dollarization - The recent decline in CNY FX aligns with the PBoC's fixing strategy, but the pace has been more controlled compared to past episodes of DXY weakness [3][4]. - Chinese corporates sold approximately $17 billion in USD in May, a significant increase from $6 billion in April, but still below seasonal expectations [11][7]. - The net FX settlement ratio showed only a marginal improvement, indicating a lack of urgency among corporates to convert USD [11][13]. FX Swaps and Liquidity - Corporates have increasingly utilized FX swaps to access CNY funding without losing the USD carry, reflecting a strategic shift in managing currency exposure [11][16]. - Onshore USD liquidity has become excessively flush, with interbank USD rates falling, making CNY financing via FX swaps more expensive than direct borrowing [11][19]. Market Conditions and PBoC Actions - Proactive liquidity injections from the PBoC have alleviated funding concerns for banks, supporting a favorable environment for front-end CGBs [28][30]. - The PBoC has reiterated its commitment to enhancing monetary policy support and maintaining ample liquidity, which is expected to continue influencing market conditions positively [28][30].