(Recasts after report on Fed facility, adds quotes, graphic)
By Saikat Chatterjee and Tommy Wilkes
LONDON, March 17 (Reuters) - Demand for dollars in the
currency derivative markets spiralled to multi-year highs on
Tuesday before slipping back after Reuters reported that the
Federal Reserve was preparing to take more steps to ease the
logjam in a key shorter-term cash market.
It remains to be seen if the resumption of a facility called
Commercial Paper Funding Facility (CPFF) in the United States
will prove more effective than the interest rate cuts and cash
injections central banks have deployed. But swap
moves abated from the extremes seen earlier in the day.
FX implied dollar borrowing costs had been blowing out as
banks held on to their dollars and braced for a wave of
corporate demand for shorter-dated cash and a possible spike in
loan defaults.
"We are looking at funding stresses in the corporate sector
as the real economy stands completely disrupted, and aggressive
monetary policy actions alone will not help," said Alberto
Gallo, head of macro strategies at Algebris Investments, a
London-based hedge fund.
Three-month euro/dollar three-month FX swap spreads
EURCBS3M=ICAP reached their widest since the 2011 euro zone
debt crisis at 124 basis points, then narrowed to around 59 bps
after the Reuters report. The rate had been around 20 bps in
early March.
A wider spread indicates market participants are willing to
pay a higher premium for dollars.
Similarly, the pound/dollar GBPCBS3M=ICAP swap spread
narrowed to 53 bps after ballooning to 90 bps earlier, the
widest since December 2008.
However, the dollar/yen basis swap - the premium investors
pay over interbank rates to swap yen into three-month dollars -
tightened to 95 bps JPYCBS3M=TKFX from 140 bps earlier.
That swap spreads have widened so much despite central bank
efforts to keep cash flowing shows the pain that companies face
as much of the global economy shuts down.
For an explainer on money markets and FX swaps: "What it tells you is that somebody is deeply deleveraging
and is in real need of dollars," said Sebastian Galy, a senior
macro strategist at Nordea Asset Management.
"There is blood on the street -- we just don't know where it
is."
Now, investors will keep a close eye on the U.S. commercial
paper market USDCP1= , where companies tap funds for
shorter-dated loans and which has been more or less frozen.
REACHING LIMITS
Following the coordinated round of interest rate cuts led
by the Fed's 100-basis-point cut on Sunday, some of the biggest
banks in the United States said they would access the Fed's
discount window, a facility aimed at providing emergency
liquidity to banks.
Earlier on Tuesday, the Japanese central bank pumped $30
billion into markets with an 84-day dollar funding operation,
its biggest since late 2008. In a sign liquidity issues are not much affecting the
interbank market, so called FRA-OIS spreads 0#USDFWDF-O=R --
essentially a gauge of the risk banks attach to lending to one
another -- had come off highs.
But after the Reuters report on the possible Fed measure,
the three-month FRA-OIS eased further to 58 bps, well off
multi-year highs of 75 bps hit in the previous session.
Algebris's Gallo said, however, that monetary policy had
reached its limits and the "game changer" was fiscal stimulus.
That seems to be underway -- the U.S. government will seek about
$850 billion in funding to boost its economy and Britain plans a
rescue package for businesses threatened with collapse.
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fundingsqueeze https://tmsnrt.rs/390oArY
FRA-OIS spread https://tmsnrt.rs/2vshyyy
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