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Liquidity Dries Up Ahead of Fed Meeting

Wednesday, 27 Apr 2011 | 11:36 AM ET
Stack of U.S. hundred-dollar bills
Stack of U.S. hundred-dollar bills

The Easter holiday combined with anticipation of the Fed press conference has drained liquidity from the currency markets.

That sure was a nice long weekend!

But the Easter holiday, combined with the markets' intense focus on the Fed Chairman Ben Bernanke's press conferencetoday, has taken significant liquidity out of the currency markets. The Barclays Capital Liquidity Index is close to January levels, according to a new report from analysts there.

Here's the tricky part: the volume of short U.S. dollar positions has not fallen as much as liquidity. The difference, according to David Forrester, a strategist at Barclays Capital, "suggests that while investors are nervous about the FOMC, the question they have been asking themselves is whether they should add to short USD positions as opposed to reducing them and taking profit. This is another signal that the market expects the FOMC to remain supportive of USD-funded carry trades."

Maybe so. But whatever the Fed says, a lack of liquidity could make any news have a more dramatic effect. Be careful out there.

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm.

"Money in Motion Currency Trading" repeats on Saturdays at 7pm.

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