It's all about the cross-currency basis today
Year-end funding squeeze is on
The law of unintended consequences is operating in full swing this year. Changes in banking rules made it tougher for banks to operate in the derivatives market and as a result, a dollar squeeze is underway.
This is the chart everyone is talking about today.
The last time it spike lower -- representing the difficulty in getting dollars -- was last December. The problem appears to be much bigger this time.
One line of thinking is that the dollar shortage will drive up the US dollar. If you look back to last year, EUR/USD bottomed in late-Dec/early-Jan of last year, at the same time as the basis was spiking.
It was also a theme two years ago, and something we wrote about. That year EUR/USD rallied late but it might have been skewed by central bank moves.
What's not clear is how much the cross currency basis is affecting the spot market. For sure, it's a problem for banks and last year Societe Generale said it was responsible for its worst trading day of the year. However analysts at the same bank say it's not a big factor in EUR/USD trading.
"Perhaps it's a bit of a drag on the euro but only as one of a multitude of reasons," says strategist Kit Juckes.
I don't have the answer, but at the moment, many in the market definitely think it's going to give the dollar a boost into year-end, and that alone might be enough.
In any case, it's something everyone is talking about today and if the law of unintended consequences is any guide, someone is going to get hurt.