Profile picture
BisphamGreen @BisphamGreen
, 23 tweets, 2 min read Read on Twitter
I am going to talk about a subject close to my heart ... cross currency basis. There's a lot of misinformation about it on here
it is the difference between onshore and offshore yields, which limitless balance sheets allowed to be arbitraged away pre-08
this all ended, in many cases ignominiously, in the financial crisis as interbank markets froze
EURUSD basis became a symbol for the Eurozone crisis as it was viewed, partially correctly, as an indicator of euro bank health
systemic bank credit risks have faded, partly thanks to emergency measures from central banks and partly global recovery
but has FX basis stopped moving? No, of course not, because it isn't solely about banks willingness to lend to each other
at the moment, as was the case in December 2015 and 2016, dollars are in demand, as evidenced by moves in FX basis
this isn't a symptom of increased credit risk, or tighter Fed policy, it's just a year-end effect as banks lock in dollar funding
banks use their euros or yen or whatever and use an FX swap (or cross-currency swap) to get term funding in dollars
this increases the cost of dollars compared to LIBOR and reduces the rates of euro compared to EURIBOR/EONIA
as much as LIBOR and EURIBOR don't mean a great deal, the FX basis links them to the real world
so where EURUSD basis over New Year is -60 or -70, that means EUR FX implieds are EURIBOR -65bp say or -1%
so as demand for dollars increases, the attractiveness of euros, yen and whatever else falls as implied yields fall deeper -ve
where can it go? The past couple of years show FX basis falling to around the current levels by year-end
of course it can go a lot further. Much further. The arbitrageurs no longer exist and it is the banks who need the $
and it is still only 8th December. The dollar was bid into year-end 2015 and 2016 and I see no reason to be different this time
indeed, the current environment is much more sleepy than it was back then. Vol is low and complacency is rife
... don't be the last person to join the hunt for dollars
so...
is FX basis an indicator for the end of the world? It was once but won't be again for a long time
is FX basis liquid and does it give a real signal? Yes. Hell yes. FX swaps are the largest markets in the world
so short term EURUSD basis at -70bp or whatever is real. It means something. And no-one is going to stand in the way until 31st Dec
it's a sign of demand for dollar funding and it is making eur and yen less attractive
no-one is buying dollars outright but their actions will distort both FX markets over an increasingly illiquid period
Missing some Tweet in this thread?
You can try to force a refresh.

Like this thread? Get email updates or save it to PDF!

Subscribe to BisphamGreen
Profile picture

Get real-time email alerts when new unrolls are available from this author!

This content may be removed anytime!

Twitter may remove this content at anytime, convert it as a PDF, save and print for later use!

Try unrolling a thread yourself!

how to unroll video

1) Follow Thread Reader App on Twitter so you can easily mention us!

2) Go to a Twitter thread (series of Tweets by the same owner) and mention us with a keyword "unroll" @threadreaderapp unroll

You can practice here first or read more on our help page!

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just three indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member and get exclusive features!

Premium member ($3.00/month or $30.00/year)

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!