I have spoken a lot about cross-currency basis swaps, but many people may still be wondering what a cross-currency basis swap is and why they should even care?
Well liquidity has been low, I think obviously though they will have to change monetary policy, as we are already seeing massive repercussions. This actually started even before QT so this will just make the problem worse.
Suppose we see contagion in the European financial sector due to the looming energy crisis, do you think the Fed can open swap lines and FIMA repo facility (as they did during covid and GFC) with ECB to ease the dollar shortage? Also, to add further, can by any chance, if a big European bank goes down under, can we get jitters across the US banking system?
I definitely believe that we will see swap lines and FIMA repo facilities start to rip again, and I think that will really send a shock that dollar shortage is very much real. However, even when they did that it didn’t completely alleviate the premium, so that means there was still a dollar shortage even during COVID. Finally yes I do agree, that a ripple of European banks going under of not even going under but facing solvency issues could send ripple effects into the US financial sector.
How does QT play into this? They can’t do QT with low liquidity, right? Will they back off this first or rate hikes?
Well liquidity has been low, I think obviously though they will have to change monetary policy, as we are already seeing massive repercussions. This actually started even before QT so this will just make the problem worse.
Suppose we see contagion in the European financial sector due to the looming energy crisis, do you think the Fed can open swap lines and FIMA repo facility (as they did during covid and GFC) with ECB to ease the dollar shortage? Also, to add further, can by any chance, if a big European bank goes down under, can we get jitters across the US banking system?
I definitely believe that we will see swap lines and FIMA repo facilities start to rip again, and I think that will really send a shock that dollar shortage is very much real. However, even when they did that it didn’t completely alleviate the premium, so that means there was still a dollar shortage even during COVID. Finally yes I do agree, that a ripple of European banks going under of not even going under but facing solvency issues could send ripple effects into the US financial sector.
Thanks! :)