Corona-virus Outbreak Worsens
Wall Street Braces For More Volatility
Saudi Arabia Launches Oil Price War
U.S. Inflation Data, Last Batch of Earnings
European Central Bank Meeting
PREVIOUS WEEK MARKET (2ND - 6TH MARCH'2020)
THE CURRENCY SWAP GAME
The Cross currency swaps and FX swaps allow investors to raise funds in a particular currency, such as the dollar, from other funding currencies such as the euro. Cross-currency basis swap, or relative premium for swapping euro or yen (LIBOR) for dollar (LIBOR), has widened across all maturities this week. The one-year yen cross rate had grown to nearly -50 basis points on Friday, the highest since mid-December 2017.
The cost of raising U.S. dollar funds in the Japanese and European currency swaps market has surged this week, suggesting increased demand for the greenback and heightened funding stress related to the fast-spreading corona-virus.
Analysts said swap spreads between 30-40 basis points are a warning signal and would be problematic if they get into the 50s area. One-year swaps widened to record levels during the post-Lehman bankruptcy period in November 2008 when spreads surged to -102 basis points. That led to the introduction of currency swap lines between central banks, partly dampening the pressure on short-term dollar financing. Since cross-currency and FX swaps are subject to counter-party and credit risks, the pricing of these contracts is affected by perceptions of creditworthiness of the banking system, or external risks than can affect liquidity, analysts said.
To be sure, these are nowhere near the levels seen during the global financial crisis in 2008, or the European sovereign debt crisis in 2011.
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