Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that the rise in US LIBOR over US cash rate expectations (LIBOR/OIS spreads, and FRA/OIS spreads) is a factor behind the rebound in USD in recent days.
“A variety of analysts suggest that it may be related to the US tax reform; including incentives for companies to reduce their cash hoards (short-term USD paper) held in offshore markets. And an increased supply of US Treasury bills, raising the competing yields in US commercial paper markets. Such factors may suggest that there is a structural shift up in the LIBOR/OIS spread that while adding to corporate and bank funding costs modestly, is unlikely to blowout to severe proportions and trigger broader asset market correction.”
“In past times, a rise in USD term funding costs might represent some stress in credit markets and lead to a squeeze higher in USD exchange rates. However, it seems unlikely that there would be generalized credit stress at this time of a relatively upbeat global economy, ongoing QE policies in Japan and Europe, and excess liquidity in the US banking system.”
“The recent volatility in equity markets and wider credit spreads might be feeding back into higher funding costs, and vice-versa. However, in recent sessions, as equities have fallen and credit spreads have widened, FRA/OIS spreads have narrowed from recent highs. As such, there appears to be a limited connection between the two.”
“Analysts have also noted that if there were a genuine squeeze on dollar funding, it would tend to widen cross-currency basis swaps. In fact, these have narrowed suggesting that there has been little evidence of a scramble for USD funding from most other major countries.”
“There has been no apparent correlation between the USD exchange rate and FRA/OIS spread widening. It is possible that the spread widening helped stabilize the USD In recent months, but the evidence is far from convincing.”