As financial markets have experienced widely unforeseen turmoil, dollar funding markets have remained surprisingly subdued.
Out of the numerous events that triggered the unwinding of leveraged positions across various asset classes, the so-called reversal of the Yen carry trade has been touted as the major causality. Yet the $/¥ (yen-dollar) cross-currency basis — a sharp downward turn of which implies severe market stress — has barely dipped (see above), while other cross-currency bases have traded flat, signaling that the most recent "crisis" was forced selling & balance sheet deleveraging — not a funding panic.
The JPY/USD cross-currency basis (XCCY basis, or simply the basis) is the premium/discount associated with swapping yen for dollars in the FX swap markets. A more negative (tighter) basis indicates that the world is hungry for dollars (see: March 2023 bank panic above, which compelled the Fed to open its global dollar swap lines like it did during COVID).
The XCCY basis is structurally negative for dollars, meaning that there is always a "shortage" of dollars. The extent to which it is negative measures the degree to which dollars are needed.
Onshore money market rates for repos and Fed Funds continue to trade in their semi-zombified state. Compared to volatile FX and equities, money markets have been living in a parallel universe.
That is except for the most perplexing move in a repo rate benchmark since the infamous September 2019 "repocalypse". This time, instead of all major repo averages exploding through the upper limit of the Fed’s target range (as it did in 2019), just one has breached the U.S. central bank’s lower boundaries.
Recall that the Fed's ceiling on rates is generally fixed as the central bank can supply an unlimited amount of dollars as repo loans, but the rates floor remains leaky by design as the Fed does not control the supply of or demand for collateral.
That's pretty significant.
1/4