Global Dollar Liquidity Shortage Explodes - Worse Than European Crisis

Very quietly, in the last few days, cross currency basis swaps (CCBS) related to the dollar have reversed their rise and started collapsing deeper into negative territory… again. This might not be of much interest to buyers of global equity markets at this point, but it is signalling ominous signs of growing funding stress in the financial “plumbing”.

As Bloomberg notes “cross-currency basis swaps, which money managers and corporate treasurers outside the U.S. can use to borrow in dollars, remain close to the widest levels since January even after quarter-end, when such financing strains typically dissipate. The market was a key indicator of stress during the financial crisis, and while it’s nowhere near the alarming levels of that era, it’s still garnering the attention of analysts.”

The shortage is across all the majors...

The shortage in Europe is the worst since the EU Crisis and the shortage in UK is the worst since Lehman as Japanese dollar shortage is extreme too.

In simple terms, the CCBS is the cost in basis points (typically for three months) of swapping these currencies into dollars over and above prevailing interest rate differentials. In a benign environment the CCBS should trade at zero, not in negative territory. The latter implies a shortage of US dollar balance sheet (credit) offered by the global banking system. As the chart above shows, dollar liquidity became extremely tight in December 2016, especially for Yen borrowers, although it not nearly as bad as what happened in May of 2015 when we first brought attention to this little followed corner of the financial system. Despite the weakness in the dollar during much of the current year, the dollar liquidity issue never completely disappeared.

There are several reasons why, like in recent years, financing in dollars is becoming more expensive, but this very sudden spike in dollar funding costs - i.e. a sudden dollar shortage - likely combines the effects of  the perception of credit risk for the European region’s banks (Italy), the prospect that a U.S. tax overhaul could trigger dollar repatriation, and the outlook for monetary-policy divergence with the Federal Reserve starting to unwind its balance sheet, and analysts see the trend only worsening (even as Draghi promises to taper).

As is clear above, there are always year-end liquidity strains but this collapse is drastically beyond just that.

“My first take on this a week or two ago was that a lot of the stress was just people preparing for the end of the year earlier,” Lyn Graham-Taylor, senior rates strategist at Rabobank.


“But now it does look pretty bad.”

As WSJ reports, the scarcity is having other effects, boosting some markets.

The widening of the basis swap makes it more lucrative for any U.S. investors who can expand their balance sheets to buy euro-denominated assets, given banks are so keen to get their hands on their dollars. As a result, the eurozone’s safest short-dated bonds have rallied in recent weeks.

“The combination of a decline in excess reserves, higher short-term rates, and dollars coming back to the US from overseas earnings should result in a structural shift in the money markets and dollar-funding availability,” said Nomura in a research note this week.

Emerging markets are even more exposed to the U.S. dollar than advanced economies like the eurozone.

“The reliance on US dollar funding has become increasingly marked for emerging markets since the global financial crisis in international debt markets,” the research noted.

And it appears the cracks are starting to show as The Fed increases its normalization liquidty suck out.


CNONC pitz Fri, 12/15/2017 - 22:05 Permalink

The "money" referenced by those expecting repatriation exists as dollar denominated deposits in non US banks.  Those deposits form the foundation for non US based dollar denominated lending.  Those dollars lent into existence by foreign banks are the "eurodollars."  Even if those eurodollar loans are invested in the US (they generally aren't, though) if the dollar deposits are transferred from the balance sheet of the lender, the lender has to seek dollar liabilities.  If many such lenders begin seeking these dollar liabilities at the same time, a "dollar shortage" occurs, which can't be mended by Fed printing, as the Fed has no conduit to non US banks. (Although ZeroHedge made a compelling series of arguments back during the crises that US bank bailout money actually flowed, through US based subsidiaries of foreign banks, to European banks to fill the eurodollar shortage.)"Title" to the money is not just a piffle.  It is the determines the Authority Having Jurisdiction for taxation.  If tax laws change and, on the margin, some corporations choose to retitle the money as a US asset, eurodollar funding shortages could occur.  The question is, how much leverage is in the system, and how reliable are the dollar income streams that provide the dollars to service these debts.

In reply to by pitz

pitz CNONC Sat, 12/16/2017 - 04:20 Permalink

That doesn't make any sense.  A USD$ deposit or loan is a USD$ loan, whether it is done by an entity that is nominally 'offshore', or not.  All that 'repatriation' in the context of the tax code changes accomplishes is lowers the effective tax rate on such funds, but does not change the character or nature of such funds.   There would be no impact in the process of 'retitling' other than the IRS would gain title to some of the funds as they would be paid in satisfaction of the deferred tax liability.  Don't see where eurodollars comes into play at all.  The funds are already largely in or available to the US banking system.  Apple, for instance, manages their "offshore" cash hoard out of an office in Reno, Nevada -- no euro-anything involved there.

In reply to by CNONC

CNONC pitz Sat, 12/16/2017 - 09:36 Permalink

You don't seem to understand what the Eurodollar is.  It is a major source of capital in international trade, but, though denomonated in dollars, sits mostly outside the US ability to regulate.  If eurodollars didn't exist, any entity wishing to borrow in dollars would have to do so in the US, subject to US regulations, criminal and civil law, sanctions and required reserve ratios.  None of these apply to foreign banks.  These eurodollars are lent existence in the usual way, with the total increase in money supply being equal to the inverse of the reserve ratio times the amount of the initial deposit.  But what is the reserve ratio?  It is effectively near zero, meaning foreign banks can create dollars almost at will, limited only by their risk tolerance.  As leverage increases, risks of liquidity shortfalls rise in importance relative to solvency risks.  Since the basis for eurodollar lending is dollar denominated deposits in foreign banks, anything that tends to reduce those deposit levels reduces liquidity.  If liquidity concerns are already extant, the willingness of banks to make more dollar denominated loans falls as well, further restricting liquidity in a positive reinforcement loop.  Note that most of these transactions are very short term, mostly overnight money.  This is why liquidity crises seem to blow up out of nothing.If you are a Japanese, or Chinese, or European bank already near your maximum level of risk appetite for having dollar denominated assets, a hint of decreasing liquidity, such as American firms with doillar deposits in your bank moving the money to a US bank, resulting in a weaker ability of borrowers to service the dollar debt, tends to lead to outsize moves to limit risk.

In reply to by pitz

To Hell In A H… Fri, 12/15/2017 - 14:49 Permalink

The dollar should be worth shit and bonds should be junk status. The USSA is living off other nations back. Fucking parasite nation. Liquidity shortage with all that QE? The USSA dollar world reserve currency Ponzi scheme is worse than I thought. If sucker nations do not hold dollars they can't trade certain commodities. What a scam.

HRClinton To Hell In A H… Fri, 12/15/2017 - 16:02 Permalink

People, companies and nations need to free themselves from the (((Money Parasites))), by having a healthy PARALLEL Economy.Parallel Economy = CB fiat killer   = Decentralized, discreet, not tracked easily or at all   = Barter + PM + CC1 + AA2     1 Crypto Currency,     2 Appreciating Assets (Antiques, some Art, Diamonds, Gems, prime RE)Got clarity and civic courage? Pass the word.

In reply to by To Hell In A H…

rp2016 Fri, 12/15/2017 - 14:57 Permalink are supposed to honor the limits of law. President Trump has destroyed my life by forcing me to break laws that are possibly punishable.I hereby request the Joint Chiefs to1. Execute The President of United States, Donald J. Trump for committing treason.2. Execute The Prime Minster of Israel, Benjamin Netanyahu as an enemy combatant.These are you two orders, should you choose to execute.Once you agree, we can proceed to execute all the Congressmen and Senators (only men), for Treason, and also the rest on the Treason list. I am watching every act of this rape.... enduring every moment of it.

HRClinton rp2016 Fri, 12/15/2017 - 16:21 Permalink

ZHers talk a good BS story* about libertarianism, but it's all talk.Their Stockholm Syndrome is so pervasive, that they'd rather sing and howl the Plantation Blues, than do what it takes to leave the Plantation.They prefer the familiar hell of their (((Masters))), than the unknown heaven outside. They have been dumbed down, beaten down and stripped of relocation skills so much, that they behave like disgruntled vassals and slaves, than warriors in the War of Independence.These designer-label Patriots (Paytriots!) are so proud of their brave ancestors, but they are like the Potato plant: All the wealth is underground.* Philosopher Carlin, on American bullshit

In reply to by rp2016

jughead Fri, 12/15/2017 - 15:05 Permalink

Please, please, please, keep the wheels on the wagon long enough for my wife to get her 401k cashed out in early January and get the money into something tangible and useful.