Dollar Slides As Liquidity Shortage Fades: Fed's Term, Overnight Repos Both Undersubscribed

Minutes after the Fed announced that the third and final term repo saw only $49BN in submissions, some $11BN short of the full allotment and thus undersubscrubed following a spike in demand in Thursday's term repo, the Fed also confirmed that the funding shortage has eased at the overnight level, with only $22.7BN in submissions for today's $100BN overnight repo operation.

This was the lowest number of submissions into an overnight repo since the Fed restarted the operation last week after a decade hiatus...

... and an indication that between the three term repos and the constantly rolling overnight repo, the Fed may have found the sweet spot for how much additional reserves are needed, which as of this moment amounts to $161.7BN ($22.7BN in overnight repo; $30/$60/$49BN in term repos).

The news that both of today's repo ops were not fully allotted appears to have eased pressure on the dollar which dropped to session lows moments after the repo results hit the tape.

And so, with the Fed's balance sheet now $162BN bigger, the only question is whether overnight G/C repo will remain in line or start rising once again: if it does, then one can conclude that the US financial system has a reserve shortage of about $160BN. If rates start rising again, the number will be bigger.

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One day after the Fed concluded its 2nd upsized, $60BN term repo on Thursday and which was notably oversubscribed - which sparked fresh concerns about dealer funding needs heading into quarter end - moments ago the Fed released the results of the final, third term repo which indicated that while funding tensions remain, they appear to have eased as the Fed accepted "only" $49 billion in the undersubscribed operation, which accepted all $34.55BN in Treasuries and $14.450BN in MBS that were tendered.

Why is this good news? Because some had feared that the third repo would also be oversubscribed, hinting that some dealers would not be able to find all the liquidity they need into quarter end. That, however, did not happen and instead as of this moment, all dealers who were concerned about their quarter-end funding needs should have the appropriate liquidity needed.

Now the only question is what the results for today's overnight repo operation will show. If funding stress is indeed easing this too should be well below the full $100BN allotment.