Dollar Shortage Goes Mainstream: When Will The Fed Confess?

Last week we posted the report by ADM ISI’s Paul Mylchreest ‘Dollar Liquidity Threat is Getting Critical and the Fed is M. I. A’which summarized some of the key points in the ongoing, second phase of global dollar shortage, profiled here first in the start of 2015 and validated recently by the BIS. We discussed the bitter (and all too predictable) irony that the Federal Reserve doesn’t ‘get it’, having recently declared that that liquidity in financial markets was ‘adequate.’
It isn’t.
More than 68,000 hits later, we suspect that many ZH readers are tracking the dollar liquidity crisis (and Fed ignorance) via the negativity in Cross Currency Basis Swaps (CCBS). The 3-month Yen/Dollar CCBS has made a new low of 81.75 bp (swapping Yen into dollars for 3 months costs 81.75bp annualised above covered interest parity) implying that the structural dollar shortage is deteriorating.
While we’ve been writing about dollar shortages since the GFC, Mylchreest traced the timeline of the current shortage back to the first RMB devaluation in February 2014. He noted that it’s the one thing that even the central banks struggle to control… think Swiss Franc peg (SNB), impact on carry trade and the Yen (BoJ) and the severe weakness that we’re seeing in the RMB (PBoC). Indeed, a ‘glaring omission’ is the failure of the Fed to set-up a dollar swap arrangement with the PBoC.

This post was published at Zero Hedge on Nov 24, 2016.

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