In this article we will talk about the FX Swap rate, one of the most overlooked and least understood term of the foreign exchange market from the vast majority of traders and that really represents the backbone of the Netswap trading strategy.
What is a FX Swap rate and what does it affect it?
A FX Swap rate, also called Overnight rate or Rollover rate or simply Swap, is an interest associated to every currency pair of the Spot CFD market that is automatically debited or credited to the trading account whenever a position is held overnight.
The Swap rate of a currency pair is mainly based on the difference between the interest rate (Tomorrow Next Deposit Rate) associated to the country of the currency bought and the interest rate associated to the country of the currency sold.
Since in the FX market it is possible to either buy or sell a currency pair, there are two Swap values associated to each pair, one for a Long position and one for a Short position.
If the Swap rate is positive, the interest is credited to the trading account; if the Swap rate is negative the interest is deducted from the trading account.
Even though countries’ interest rates are usually the main drivers in determining the Overnight rates, there are nonetheless other factors that influence these values such as the current liquidity and volatility of the pair and other marketing as well as risk-related reasons that are assessed by brokers themself.
It’s the combination of the above elements that creates Swap rates discrepancies among brokers and make the Netswap strategy possible.
Where does the name Swap come from?
The name Swap rate can be traced back from the Spot FX market; a Spot forex transaction is a bilateral agreement where two parties agree to exchange a given quantity of a currency for another at an agreed price with immediate delivery. Actually, the term “immediate” refers to a two-day delivery so that enough time is given to both parties to do the necessary paperwork and wire the money.
As the Spot FX market is mainly used for speculative reasons, traders are rarely interested in being part of the delivery process and therefore brokers automatically “swap” the settlement date of a transaction with the following settlement date by closing the position and re-opening it instantaneously at the end of each day until traders are ready to exit the position by offsetting their liability with their counterparty.
When the “swapping” process occurs, the account of the trader incurs either a cost or a credit depending whether the interest rate differential between the currency bought and the currency sold is negative or positive.
Swap charging time and 3-days Swap
One of the very well know feature of the Forex market is that it never goes sleep on weekdays.
This has an important implication over Swap rates, that is, there isn’t a fixed time of the day upon which all brokers debit or credit the Overnight interest. The vast majority of brokers apply the Swap at 5 PM EST or 10pm UK time as that hour is considered the “end” of the trading day by the FX community but a direct contact with the broker is needed to know the point in time at which the Swap charging/crediting process takes place.
Another very well-known fact about the FX market is that it shut down on weekend, this mean that the amount charged or accrued due to the Swap rate must be three times higher during one business day in order to account for the quantity that would be charged/credited when a position is keep opened amidst the market closure.
Although it may seem like a logical choice to apply the 3-days Swap on Friday, that is not always the case, indeed, most brokers do this on Wednesday. Moreover, the day doesn’t only vary from broker to broker but also from pair to pair.
Luckily, it is not necessary to talk with the broker to know when the 3-days Swap is applied as this info is easily reachable inside the Metatrader platform.
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