“This is worrying," tweeted Robin Brooks, chief economist at the Institute of International Finance, a global trade group composed of the 400 most important banks and financial institutions around the globe.
What Happened: Brooks warned of stress building up in the global financial system, as a widening of the cross-currency basis indicates a growing shortage of dollars worldwide.
Current measures by the Fed to level down domestic inflation are replicating globally, further affecting the price of foreign currencies and the abilities of these countries to reach their economic goals.
Cross-currency swaps are contracts made between companies of different countries by which they exchange interest payments and principal in two different currencies.
Companies and banks do this to obtain foreign currency, by basically swapping loans and agreeing to pay them back at their original exchange rate. In cross-currency basis swaps, companies agree to pay interest in one currency and receive interest in another.
Why It Matters: The cross-currency basis is generally taken as a measure of dollar shortage in the market. The more negative the basis grows, the more severe the shortage.
Cross-currency basis swaps usually drop at the end of every quarter but reach their lowest point toward the end of the year.
Picture by Robin Brooks on Twitter.
Brooks, a former chief forex strategist at Goldman Sachs GS, pointed out that the cross-currency basis is becoming more negative than usual for this time of the year, reaching year-end levels.
This sign forecasts a possible bomb about to explode in the global financial market by the end of the year. As many cross-currency contracts end and the market needs dollars to square off commitments, foreign currencies could become severely affected by the rising dollar shortage.
Shutterstock image.
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