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Dollar Funding Strains Return Amid Blow-Out in FX Volatility

Stephen Spratt, Anooja Debnath and Liz Capo McCormick
Dollar Funding Strains Return Amid Blow-Out in FX Volatility

(Bloomberg) -- Strains in dollar funding markets re-emerged late Wednesday after global currency markets turned suddenly illiquid as U.K. authorities considered locking down London, the center of foreign-exchange trading.

Cross-currency basis swaps for the euro-dollar pair, a proxy for how expensive it is to acquire the greenback, showed renewed signs of stress following a brief reprieve. On Tuesday, they touched levels last seen in 2011, before euro-area banks took $112 billion made available through a special central bank operation, providing a brief period of respite.

Dollar funding markets more broadly got a bit of a breather in the wake of new Federal Reserve policy measures and news of a U.S. Treasury department proposal to support America’s money-market mutual funds, but these improvements also pared as the day wore on. Commercial paper rates, meanwhile, have continued to climb.

“Corporates around the world are drawing on their credit lines to ensure they have enough liquidity,” Robert McAdie, BNP Paribas SA’s chief cross-asset strategist, wrote in a note. “This is creating a surge in the cost of dollar liquidity.”

Here’s a look at some key funding metrics:

Cross-Currency Basis Swaps

Three-month euro-dollar cross-currency basis swaps inched wider, after tightening to as much as 11 basis points, a slight premium for getting euros.


The gap between the three-month London interbank offered rate for dollars and overnight index swaps sat at its widest since 2009 as of Wednesday’s setting, led by an increase in the key global fixing. The so-called FRA-OIS spread -- which is futures traders’ outlook for the trajectory of funding stress going forward -- also expanded after earlier improvement.

Commercial Paper

Rates on three-month commercial paper for non-financial companies reached a record relative to OIS. As companies raise cash ahead of an economic slowdown, they appear to be having difficulty selling the short-term IOUs -- a common occurrence during times of stress when money funds show a preference for safe assets.

However, the Fed’s late Tuesday announcement of a Primary Dealer Credit Facility may support sentiment. This allows primary dealers to borrow at the 0.25% discount window by pledging different assets, including investment grade debt securities and municipal bonds. Alongside the earlier announced commercial-paper facility, this will begin on March 20.

Read more: Why It Matters That the Libor-OIS Spread Is Widening: QuickTake

(Updates moves throughout.)

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