As noted two weeks ago when predicting the efficiency and duration of the latest global coordinated USD liquidity injection, we had a sinking feeling the Fed action would have a very brief time span. Sure enough, judging by the action in two critical FX liquidity indicators - the 3M and 1 Y basis swap indicators, the dollar shortage is baaaaack... only this time, very paradoxically, with implied infinite backstopping from the Fed: if even that factor no longer has an influence on the market's perception of liquidity risk we are in very deep trouble. Which of course is to be expected: the gross synthetic dollar short back in 2007 was $6.5 trillion. Add a few years of ZIRP to this, where the USD is also the funding currency of the world, and one can see why the global USD short position currently is in the double digit trillions. So just how will the Fed backstop $10+ trillion in explicit USD shorts? We can't wait to find out.
3 Month Euro Basis Swap now almost back to pre November 30 global bailout levels:
... but the real action now is in the 1 Year Basis Swap which is back down to December 2008 levels.