Expectations: Putting Out A Fire With Gasoline?

Continuing from Interest Rate Swaps: Putting Out A Fire With Gasoline?

Interest rates are NEVER to be misconstrued as the PRICE of money.  Interest rates are the price of LOAN FUNDS, and the price of MONEY is reflected in indices and FX pairs.   

Any fixed rate payer anticipating a decline in rates might hedge their position through IRS (interest rate swaps) or by utilizing a synthetic IRS in the form of Eurodollar strips.  Must be some pretty big parties who are anticipating a decline in rates and want to hedge their positions? 

Now think anyone (leveraged or not) doing forward dollar swaps or synthetic ED who is short (borrowing) the dollar.   

Moving West... Aside from some very large parties hedging against declining rates, what is declining 90 day USD LIBOR signaling?  Lower growth expectations?  While everybody keeps watching the SP500, where valuations are so far removed from reality as to NOT be a reflection or mirror of real economic conditions (past, current or future)....

Argentina, Brazil, Venezuela all under water, IMF downgrading global growth forecasts, Japan announcing lowered GDP expectations, BOE announcing GDP expectations worse than 2008, EU IP tanking, Italy in official recession, Germany avoiding such by a hair, with factory orders off a cliff, and US retail sales tanking... 

Oil flash crashing 40% in under two months, global equity markets getting spanked in Q4, the bond market screaming lower expectations in the ten year tenure: US +2.364%; Gbunds +0.088%; JGB -0.029.  Albeit, another contributing factor to the recent bond buying spree, and drop in yields is a lack of market making collateral due to dealer hoarding which has put liquidity at a premium. 

"King Dollars squeeze up while bond yields are declining is easy to explain without false spin. UST paper is being snatched up, and you can only purchase it with one currency. Guess which one? Every dollar used to purchase that coveted HQLA collateral for liquidity is taken out of circulation and reduces the float. This puts the screws to anybody short (borrowing) the dollar. Got it?"  - A Yen For Liquidity? Or No Yen For Carry?

Witness what happens to USD carry trades (involved in conversion to obtain USD) when markets have little to no Yen for such?

Now think anyone (leveraged or not) doing forward dollar swaps or synthetic ED who is short (borrowing) the dollar.  

Moving West... of late the Chinese economy with the weakest growth in the last 28 years.  Where's your sign? All of these indicators and a decline in 90 day LIBOR in anticipation of what?  As we outlined in November 2015, China happens to engage in major FX USD/RMB forward swaps. On Monday December 17th, one year USD/CNH forward points fell to a low of 115 points, the lowest level since November 2011. Two days later the FOMC raised 25bps. 

Fed raises have been the largest negative factor for the RMB.  Why? The shrinking spread between US and Chinese yields makes RMB denominated assets less attractive, encouraging capital outflows.  If you think our correction is bad, Chinese investors have already seen a -35% haircut.  And if that wasn't bad enough, some major banks have been putting out a fire with gasoline...

Banks in China, Hong Kong and Japan have long been engaged in USD/RMB; HKD/RMB; HKD/JPY and USD/JPY carry trades to accommodate onshore (SHIBOR), offshore (HIBOR) RMB/USD funding and keep the RMB stable. We re-Nattered about Dollarized Swapped JGB's on December 17th in Meddling With Powers?

An investor can borrow yen, paying yen interest rates, in exchange for lending dollars and receiving interest on them. In other words, a bank effectively borrows one currency while using the other currency as collateral. 

This practice involves asset swaps repackaged into two year floating rate dollar bonds which would yield more than LIBOR, if investors swapped their fixed coupon into floating rates.  The alchemy of these synthetics once again invokes the Bard - "There is something in this more than natural." - Hamlet

Last but not least, lets not talk about (because we just exhumed it) the ER (excess reserves) IBDD (interbank demand) deposits sitting in New York branches of foreign banks smoldering, along with King Dollar.  Said ONE TRILLION DOLLARS is...

Funded with yankee and Eurodollar CD and CP issued to prime money funds, as well as interoffice loans from headquarters also funded by Eurodollar deposits and Euro/U.S. dollar basis swaps. - China's Dollar Swap Addiction

If one thinks none of these seemingly disparate market mechanisms and events are not correlated, guess again.  We scraped that barrel over three years ago in: Not Enough Liquidity and TEU Many Empties? and Mission Impossible: Correlations In Action? The Fed, PBOC, Treasuries, The Dollar And Swaps

More to come in the conclusion Conundrums: Putting Out A Fire With Gasoline? Stay tuned, no flippin.

Recommended reading:
Timing Is Everything?
Know Your Limitations?
Parting The Red Sea?
A Little Shop Of Horrors? 
Where's Your Messiah?
Rapture?
Ro-BUST?
Beware The Ides Of Winter?
Meddling With Powers?
The Perfect Storm?
Begin The Benign?
A Case of Tape-r Worm?
Beware The Ides of Winter Early?
A Disturbing Lack of Faith?
Canary In A Coal Mine?
FreeTrade Warning?
Global Economy Down?
Wear Sunscreen?
Trust Me On The Sunscreen?
Let Me Warn You?
Lunar New Year For Old Blind Men?
Shutdown Impacts Inflection?
LIBOR: Putting Out A Fire With Gasoline?
A Yen For Liquidity? Or No Yen For Carry? 
Interest Rate Swaps: Putting Out A Fire With Gasoline?