The minds at the German bank have been going into overdrive on reasons to be long USD
Yesterday they had three reasons to long the buck vs the pound, and today they pick the euro as the currency to get suckered on dollar strength
The new reason is the rising cost of dollar funding;
"Over the last few weeks the cross-currency basis, representing the additional cost of borrowing dollars in the FX swap market over and above the rate differential, has ballooned to the highest since 2011,"
Here are their 4 reasons why this may be important
- The widening is happening against multiple currencies, in contrast to previous episodes that have been mostly focused on the yen or euro
- Widening basis does not seem to be driven by rising credit risk, similar to Lehman and the Eurozone crisis. Alternative credit metrics such as the USD Libor-OIS spread have remained very well-behaved
- The move seems to go beyond traditional year-end funding constraints because even longer-dated cross-currency basis has widened out
- The cross-currency basis move is coming at a time when US rates are rising for the first time since the end of the financial crisis while everyone else is at zero. This matters because the low starting point of rates means the proportionate impact of a widening basis on the rate differential can be big
"Overall, a combination of year-end funding constraints, lack of liquidity, regulatory pressure and precautionary demand for dollars ahead of FOMC liftoff seem to all be driving the move in the basis...This adds to the bullish dollar view, on top of the fact that traditional metrics such as the real rate differential already point to a move down to parity in EUR/USD
There you have it. Yet another reason to sell EURUSD...supposedly. Their fourth point is perhaps the most valid. The US is looking to raise in a year when a great number of central banks have been easing, and are still far from tightening themselves. The US is going to be out in front and that's going to widen the gap which will keep the dollar on the front foot. That's where the Fed's management of the path of rates is going to come into play in keeping the market on a leash. December's FOMC could be the most dovish rate hike we've ever seen
