FX comment: Scramble for dollar liquidity intensifies
It was an old friend, still trading forward cable, who first alerted me to the beginnings of a Libor/OIS basis blowout a couple of weeks ago. But at the start of this week the move took a more desperate turn as the hunt for dollars accelerated with rumours of a Spanish bank being unable to cover its short-term USD funding.
Over the past two weeks, one-month and three-month GBP/USD FX swaps have moved from –2 and –5 to +2 and +5 respectively, equating, by my reckoning, to about 35 basis points of dollar tightening in the interest rate spread. But it took a note on Tuesday from Laurence Mutkin and Elaine Lin of Morgan Stanley to put the move in some perspective.
They point out that that the ECB’s “full-allocation USD tenders provide an unlimited amount of USD to banks at an implied OIS+100bp”. However, with that implied level still far higher than Libor and even the FX basis, the tender has so far “attracted a negligible $1 billion of interest from the market” – a different situation to 2008 when it was “accepted with enthusiasm”.