Dollar Funding Stress Is Growing And The U.K. Is Not Helping Here At All

Dec. 10, 2018 7:28 PM ETEWU, FXB, UUP, USDU, BB, DGBP, UGBP, UDN, BB:CA21 Comments14 Likes

Summary

  • It's not only the Fed. US Treasury is expected to dry up liquidity this month much more than the central bank.
  • Dollar shortage has already sent both OIS and LIBOR rates to record highs.
  • As if we needed this, the Brexit deal vote has been postponed, adding to the greenback rush.
  • If no Brexit deal is being approved - this is only a promo to what we're likely to see.
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The most significant event for the markets over the next two weeks is expected to be the decline in the amount of money/liquidity. Unlike the usual scene, this time around the central bank only plays a marginal role.

The US Treasury, the world's largest consumer of US dollar (UUP), is expected to increase its cash reserves by $70-80B by the end of the month. This means that, together with the Fed action, more than $100B will be removed from the markets during the next two weeks (some of which will be returned to the market later this month).

In the background of the US Treasury and Fed tightening, liquidity pressure in the banking system appears to keep on climbing.

The difference between the LIBOR interest rate, which measures the inter-bank rate, and the overnight interest rate of the Fed - known as Overnight Index Swap ("OIS") - continues to jump, now at >40 basis points.

This means that the dollar shortage in the market is worsening, highlighting the vulnerability of the funding markets amid increased US Treasury issuance.

Historic 3-Month LIBOR rates:

  • December 2009: 0.25%
  • December 2010: 0.30%
  • December 2011: 0.54%
  • December 2012: 0.31%
  • December 2013: 0.24%
  • December 2014: 0.24%
  • December 2015: 0.50%
  • December 2016: 0.96%
  • December 2017: 1.55%
  • Today (December 10, 2018): 2.77% >>> 10-year high!

Dollar funding stress is naturally adding to the general gloom.

The uncertainty in the UK (EWU) around the fate of Brexit is certainly adding a lot of fuel to the already stressed, currency fire.

British Pound (FXB) just hit an 18-month low against the US dollar, below $1.26, after the Brexit deal vote is delayed and uncertainty on any outcome grows.

The GBPUSD pair is down 13% from its April high.

Theresa May confirmed that she will be heading to Brussels to meet EU leaders before the summit scheduled on Thursday. She is (desperately) looking at ways of giving the UK parliament more power over backstop, ahead of voting on Brexit.

Mrs. May has also reiterated that it's ultimately this deal or no deal at all.

A no-deal is likely to send the GBP to lower levels than those it has seen on the night of the referendum, when Britons voted in favor of leaving the European Union.

Let's try to explain this in a very simple way (from a European perspective).

Everybody is doing anything in their power (and sometimes beyond their power...) to turn Brexit around. The British people voted to leave? The officials/authorities don't let this confuse them. They know better!

Let's see... How do we enforce a new referendum?... Cutting a Brexit deal the UK can't agree to, forcing a "no deal" outcome, likely see Theresa May resigning or being kicked out (well, that's a price we're willing to pay...), possibly assisting the "remain camp" to push for a new referendum.

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