There is a dollar funding squeeze underway
I had hoped the the larger and longer swap lines the Fed announced on Sunday would alleviate the funding squeeze but the demand is overwhelming. There is a huge amount of leverage in the system and it’s unwinding more-quickly than ever. In addition, emerging market money is rushing into dollars.
EUR/USD three-month FX swap spreads today briefly blew out to 124 basis points — the widest since the peak of the eurozone crisis and it compares to 20 bps in early March.
“What it tells you is that somebody is deeply deleveraging and is in real need of dollars,” said Sebastian Galy, a senior macro strategist at Nordea Asset Management, told Reuters. “There is blood on the street we just don’t know where it is.”
The thing is, the moves become self-reinforcing. USD/CAD, for instance, is making a big move higher today. Canadians see that and start rushing into US dollars.
I’m starting to think we’re on the cusp of big moves in FX. It’s also deeply concerning for the banking sector.