Remember last week when the world was desperately willing to pay excessive spreads to get their hands on dollar liquidity (the worst liquidity crisis since the European crisis)...
Well that's all over now!
EUR-, JPY-, and GBP-cross currency basis swaps have suddenly snapped higher (less negative) as dollar liquidity is suddenly not a problem anymore...
As BofA explains, this is an early holiday present for foreign investors:
For foreign investors the cost of dollar funding across year-end has been elevated in recent years. This is because many foreign banks measure capital levels at year-end and thus are incentivized to reduce balance sheet assets.
While this excess demand for dollar funding has led to very negative cross-currency basis swaps, quite unusually this week we have seen material improvement, likely as providers of dollar funding have reacted to attractive levels and stepped in.
For example 3-month cross currency basis swaps, which constitute a large part of FX hedging costs, tightened 40bs and 22bps this week for EUR and JPY, respectively.
Perhaps this this is an early sign of an expected looser regulatory regime for large US banks.
Of course further improvement is likely starting on one of the last days in December when these contracts no longer span year-end.
One thing of note - the sudden source of dollar liquidity has occurred as the long-bond has been dumped...
Are foreigners dumping the long-bond in desperation for cash dollars?