Global Dollar Shortage Intensifies To Worst Level Since 2012

Tyler Durden's picture

The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that "unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place."

Furthermore JPM conveniently noted that "given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis."

To which we rhetorically added: "who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question)."

All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade - just as we warned in November of 2014 - went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate "inflation expectations" (read: more easing).

In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:

The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.

In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 

A brief history of the three key periods of global USD-funding shortfalls:

  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.

More from JPM:

Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.


Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.

This is how it looks now:

The conclusion:

In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.

What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the "reserve streams" going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the "tight" Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.

At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD "bills" all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ThirdWorldNut's picture

As much as I want to say- " from your mouth to god's ears", I have to point that this post is more about Fuck Yellen.


TongueStun's picture
TongueStun (not verified) Troy Ounce Oct 3, 2015 6:07 PM

Easy there Troy, I hear he has anal warts

tc06rtw's picture

 A  misdiagnosis  --

           They determined it to be brain tissue.

cnmcdee's picture

The phase of the moon leads the DJIA about three days with about 93% accuracy.  Get the Free Software and find out for yourself and stop loosing money. Free Source Code Included. 

Will import any standard EODDATA dataset.

tc06rtw's picture

   Thanks for your for input!

 …  If The Fed would stop “loosing money”,  perhaps capitalism would stand a chance!

Fahque Imuhnutjahb's picture

Evidently PPT, HFT, TBTF & FOMC are star gazers.

old naughty's picture

Or, the (true) power behind them, are (gazing)...

with all them super computers, club and others.


btw, just curious, will gazing from outside in yield same interpretation? Like all them written text about stars are for us "dummies" (ah, um, sheeples) on the ground, and they "know better" from out there looking in, no?

Sword61's picture

"A  misdiagnosis  --

           They determined it to be brain tissue."


Brains ????

doctor10's picture

The attempts to extend central banking beyond its well demarcated boundaries and limits(essentially 20th century technology) is what will lead to bloodshed.

Those running the show are the persistence of a 19th-20th century cartel mindset. They are proving themselves incapable of adapting and transforming into the expectations and demands of the 21st century. Their mindset-that of hierarchical control structures-has long since past them by. The debt those structures created is a testament to their obsolescence.

That kind of thinking -which liberated man from the agricultural world-is a liability in the way of men benefiting from the information age.

weburke's picture

Too bad we have no way to applaud the Tyler's who are just incredible writers and bright lights

old naughty's picture

or a "5" at the bottom of the article.

weburke's picture

I loved reading Alan able son of Barron's and whoever wrote his pieces with him. I bet he would like the zero writers and marvel at the show and the writing during these very interesting and important times. I have worked for many super rich and you offer here views for the public that are rare. Thanks.

chopd livr's picture

there is a donate tab on top

WTFRLY's picture

So it's about that time now right? This whole thing seems to be bleeding out.

knukles's picture

This means increased demand (and likely to be all of a sudden virtual panic as something comes unwound) for super duper high quality collateral to post against futures, swaps, etc., derivative contracts.
Simply put kiddes, ain't enough to go around, let alone the classic flight to quality when TSHTF.

                   This means war!
                              -G Marx

Yen Cross's picture

 The biggest problem with paper promises, is that they're only worth the paper they're 'intern stamped 'on.

 The SINO RUSO swift alternative is a month behind schedule. "understandably"... Syria and other obstacles.

 Those sanctions have really hurt Russia? NOT

   The swift alternative will seal the deal. Good Bye greenback.

 China is a fucking nightmare, so we can have 2-4 FX ponzi's going. [price discovery]

Peter Pan's picture

It's only partly true that paper promises are worth only the paper they are written on because if someone is smart enough to convert those paper promises into gold or some other tangible assets before the day of reckoning, then obviously they are worth something (although that worth is only in the mind and not intrinsic).

10mm's picture

Have a nice fucking day.

Yen Cross's picture

 Money created out of thin air, can just as easily evaporate

 Trying to quantify leverage is meaningless

toadold's picture

Yes but where do you think Yellen got the warts in her throat.

Yen Cross's picture

 JFC! The amount of notes due has ZERO bearing on risk. The Fed has seen to that. ZIRP

 I'll get even MOAR funny. Lets speculate the leverage in the Chinese equity indexes before they crashed?

 Just because you have a paper promise, it doesn't mean you have value.

  Unappointed idiots with pensions have completely destroyed Capitalism. .Gov morons

  I'm looking forward to hanging those bitchez/

bilbert's picture

"into an actual shortage of USD "bills" all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims....................."


Waitaminit!!   Does this mean we have multiple claims on the digital 1's and 0's that we conjure out of nothing, that is causing the problem??


My head hurts...................

buzzsaw99's picture

fuck the eurotard banks

fuck the usa money markets who fund them

fuck the usa money markets that buy eu sovereign debt that yields nirple while losing on the exchange rate too

fuck the so called markets that rely on the banker's bullshit asset books to stay inflated

fuck the fed

fuck the eu


MMs - break the buck what the fuck

goldenbuddha454's picture

Spell check some ZH, Come on man!

besnook's picture

this isn't the problem. the problem is the ems looking for exdollar funding. this makes the fed's ponzi much more difficult to pull off. that means qeinfinity is a given. it also means the end game is here. it is impossible for the dollar to keep up with the reality that every dollar not borrowed from fed and euro banks is an exponential blow to their bottom line which will reach some black swan moment that blows the whole thing up for good.

only war is the answer.

BarnacleBill's picture

Don't let's get too excited about the pending collapse of the US Dollar. It's not imminent. There is a lot of water yet to flow under the bridge. Yes, prices are going up, but the pace is irregular and slow. The order of the collapse of curreencies isn't even clear, yet. Check this out.

Yen Cross's picture

 I've spent the better half, of the last hour trying to understand nuclear rocketry.

 Nuclear drives and such.

 i MEAN,  How could some retard consign itself to a one way trip?

 The only way what's left of mankind is going to explore the galaxy, will be based on alternative propulsion.

  Some special people have some good ideas, ION drives nata. Wormholes nata.

  There's absolutely zero survival rate, with current propulsion technology.

 That little faggot, subsidized, toy maker, doesn't count.

 Why can't we defeat gravity? The 747-800 and AIRBUS A-380 double decker use low pressure for lift. Like a humming bird.

   We need to defeat gravity. We need an opposed propulsion system. IT WONT BE MAGNETIC.

 btw, There's only one universe.

El Vaquero's picture

We need a much better understanding of gravity.  We need to know if there are gravitons, and we need to resolve the conflit that arises between General Relativity and Quantum Mechanics when you get down to scales on the order of a Plank Length, which are too small for existing technology to observe.  The problem is, that on the scales that we can observe, they don't conflict, and they actually predict "negative" energy when put together, and lead to an already observed prediction called the Casimir effect.  The very concept of negative energy leads to the concept of a warp drive.  But we don't understand the universe around us well enough to know if these effects can actually be harnessed, and if they can, how to harness them.  Again, we need to reconcile quantum mechanics and general relativity. 

ignorethisuser's picture

At this stage, a one-way trip away from all the chucklefucks on this planet wouldn't be a bad idea.

edwardo1's picture

This is a useful piece, ZH, but you'd be doing your readership a big favor if you simply cut to the chase, and, instead of focusing on CBs as culprits, acknowledged that the dollar funding shortage is symptomatic of Triffen's Dilemma. With so many $ funding crises in such a relatively short period of time -three strikes and you're out?- this may be indicative (one, frankly, hopes it is indicative) of the $IMFS finally reaching Peak Triffen's Dilemma.

anonnn's picture

Unfairness brings chaos.

Chaos is characterized by randomity, disorder, uncertainty and  unpredictability.

For an excellent and workable understanding of real life fairness-unfairness in operation, Nando Parrado's Miracle In The Andes is a 1st-person acccount of surviving the 1972 Argentine plane crash, in which fairness seems a/the basis for optimum results..

Seems mighty applicable to global financial undercurrents.

Explanations using words of foggy and changing meanings are being substituted for  missing essentials that are time-tested and demonstrated.

I AM SULLY's picture
I AM SULLY (not verified) anonnn Oct 4, 2015 8:36 AM

You sound like a robot.

ignorethisuser's picture

Liquidity crunch then mass bail-in?

Let's see the global cyprus, I NWO you want to do it.

bentaxle's picture

Still want to raise those rates? Well do yah...punk?!?