Liquidity, Rates and The Dollar

As we Nattered a bit on Tuesday.. Anyone invested should read this eye opener regarding negative swap spreads and the "dollar"… from the just released Dec BIS report:

"Historically, cross-currency basis swap spreads – a measure of tensions in global funding markets – were virtually zero, consistent with the absence of arbitrage opportunities. Since 2008, the basis has widened repeatedly in favour of the US dollar lender, ie there is a higher cost for borrowing in dollars than in other currencies even after hedging the corresponding foreign exchange risk –conventionally recorded on a negative basis As such, negative basis swap spreads indicate the absence of arbitrageurs to meet heightened demand for US dollar liquidity.

…While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns"

Again, following up on Tuesday... $19T in "eurodollars" and all the off shore debt denominated in it. Even a nominal raise in FF by market forces or the Fed will have the foreign CB's very busy utilizing those unlimited FX swap lines with the Fed.    And as I Nattered before, this could not happen at a more inopportune time, while the traditional seasonal contraction in monetary flows is pronounced in the extreme. Can you say "dollar" squeeze?

I mentioned Wacky Wen. before, just a reminder, this means not just month, but quarter, year end, and its going to be huuugggge… $1.1T in SP500 options alone, Zerohedge and JPM's top quant comment.