Use Of Fed Liquidity Swap Line Surges

Authored by Steve Englander, head of global FX at Standard Chartered Bank

Heavy drinking at ECB USD liquidity source

The ECB has announced the results of its USD liquidity tender. $114bn was taken up by financial institutions. The ECB and other major central banks announced that they will be conducting daily USD tenders next week. The intention is to convince market participants that USD funding will be there in any size required.

The ECB’s hope is that if it demonstrates that the liquidity is there in size, the private sector may start re-intermediating. The tenders were at low rates considering market conditions, and offered at unlimited size, but the strategy is similar to the Fed’s – ask no questions, write the check.

The effect on the EUR-USD basis was immediately visible in a sharp narrowing in recent days.

By late afternoon trading on 20 March, the basis had tightened to essentially 0bps.

However, the EUR did not respond positively to the basis narrowing, trading near recent lows. This is not unusual; the relationship between the EUR and the basis has not been very reliable over the past decade.

A sharp widening of the basis is sometimes associated with EUR weakness, but the narrowing does not seem to reverse EUR weakness, at least not quickly.

More broadly, the message may be that dealing with issues in individual money markets is a necessary condition for preventing further deterioration, but insufficient for repair.  


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