@Fdrcmln Ok got it thx
Very wide ramifications/spillovers
2017-2018 created very bad USD conditions for non-US investors as G10-USD xccy basis widened to get deeply negative (ie. Increasing high USD hedging cost and cost of funding)
That spilled over into EM corps and EU banks 1/
Very wide ramifications/spillovers
2017-2018 created very bad USD conditions for non-US investors as G10-USD xccy basis widened to get deeply negative (ie. Increasing high USD hedging cost and cost of funding)
That spilled over into EM corps and EU banks 1/
@Fdrcmln In extremely simple terms, all else being equal, the more negative the xccy basis, the higher the need to buy USD to fund USD liabilities (very bad for EM corps and EU banks with high liabilities in USD), hence USD strengthens vs other FX 2/
@Fdrcmln High USD + deep negative basis means non-US investors buying treasuries and hedging the FX risk get a negative rate, hence for EUR JPY investors become more attractive buying bunds than US treasuries (that happened ~Q2-Q3 2019)
US admin widening deficit(funded with additional 3/
US admin widening deficit(funded with additional 3/
@Fdrcmln Treasuries issuance created a whole in the investor base, and US banks had to buy treasuries replacing foreign investors demand (Q2-Q3 2019) and loaded up UST inventory
--> US banks using cash to buy treasuries means US bank not able to lend USD to large spec 4/
--> US banks using cash to buy treasuries means US bank not able to lend USD to large spec 4/
@Fdrcmln --> large spec not receiving leverage means they had to look at different funding channel, turning to interbank market, hence o/n repo rate started to rise (July-August 2019 spiking in Sept19) making leverage antieconomical and started to trigger large spec deleverage (aug19) 5/
@Fdrcmln When in late Sept early Oct deleverage was starting to take traction (posing risk to lower equity prices, forcing more deleverage cross asset (we witnessed it in March 20) the Fed intervened quickly with emergency repo auctions, relaxing o/n repo rate and saving the boat 6/
@Fdrcmln Given US banks USTs inventory extremely high, the Fed launched QE on tbills starting to directly fund US treasury
However, US banks were still overloaded with US bonds. Preventing them from lending in the interbank market and keeping USD funding conditions tight 7/
However, US banks were still overloaded with US bonds. Preventing them from lending in the interbank market and keeping USD funding conditions tight 7/
@Fdrcmln We are now at mid Dec19 when year end funding need increase and the Fed again stepped in launching new emergency repo actions to cover year end and lasting till early feb20
Again, stick save by the Fed. UST yields stable and equities up
In Feb the Fed started to withdraw 8/
Again, stick save by the Fed. UST yields stable and equities up
In Feb the Fed started to withdraw 8/
@Fdrcmln Emergency funding and the house of cards fell apart at the 1st exogenous shock trigger the unwinding and massive deleverage wave that the Fed managed to avoid in Aug-oct19 window
Mid March coordinated G10 intervention (multilateral swap lines, and repo lines) 9/
Mid March coordinated G10 intervention (multilateral swap lines, and repo lines) 9/
@Fdrcmln Helped to finally push G10-USD cross currency basis in positive territory making almost equal for EUR and JPY investors to buy USTs or Bunds (result, foreign investors started to show up again at USTs auctions)
The Fed launched QE on short end bonds, buy US banks inventory 10/
The Fed launched QE on short end bonds, buy US banks inventory 10/
@Fdrcmln And freeing up US banks balance sheet to start lending again to large spec and into the interbank market
= financing conditions had been notably eased. Liquidity reversed again into treasuries and equities very quickly (and we are now at Aprul20)
The Fed then started to 11/
= financing conditions had been notably eased. Liquidity reversed again into treasuries and equities very quickly (and we are now at Aprul20)
The Fed then started to 11/
@Fdrcmln Roll back the unprecedented stimulus: 500bn repo action not renewed. USTs and MBSs QE now runs at "just" 8bn/day
USD although stayed in good demand because of the exogenous shock (Covid19) putting pressure on global growth and keeping the US as safe Harbour to park money 12/
USD although stayed in good demand because of the exogenous shock (Covid19) putting pressure on global growth and keeping the US as safe Harbour to park money 12/
@Fdrcmln Last, should global growth falter over next quarters (likely) USD is likely to stay in demand, re-tightening funding conditions and putting us back at tweet 1/ but now global CBs have shot all their shots and have limited space to intervene but directly bailing out Corp debt 12/
@Fdrcmln Which in part they promised to do
Last step if USD further appreciates, and now it's my guess, is going to be some sort of plaza accord 2.0 with direct sell of USD in the open market from global CBs to depreciated the USD
The issue to this action? Investors will sell all 13/
Last step if USD further appreciates, and now it's my guess, is going to be some sort of plaza accord 2.0 with direct sell of USD in the open market from global CBs to depreciated the USD
The issue to this action? Investors will sell all 13/
@Fdrcmln Their USD denominated assets (treasuries, gold, equities) to avoid large FX losses in their pnl
I hope this long thread somewhat clarifies why USD is focus and main worry at mom
End/
I hope this long thread somewhat clarifies why USD is focus and main worry at mom
End/
