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Investors Whistling Past the Graveyard; Got Dollars?
In reality, however, it suggests no such thing; what it does indicate is that despite what is really an arbitrage opportunity and with some great size potential no bank(s) is (are) willing to offer enough balance sheet capacity to right the risk perceptions and get swap rates back above their companion UST yields. In other words, a shortage of balance sheet capacity which, in the 21st century banking world, might as well be termed as a "dollar shortage." Two entirely different swap regimes yet same conditions, results and interpretations, and, more importantly, occurring simultaneously while predicting and continuing through those liquidations.
One not fully swayed by textbooks or Janet Yellen's narrative might get to thinking that there was something really wrong with global banking. In fact, the burden of proof is actually on the other side, meaning that "something wrong with global banking" so easily fits within the current shape of the financial world that the dominant, mainstream message is the one that is so absurd that it should be dismissed outright unless backed by something more than Apple, Inc.
Unfortunately, the anecdotes do not end there. The nation of Egypt, for example, has been noted in recent years more for political turmoil than anything else. It might not be surprising, then, to find financial difficulties accompanying those circumstances even if lingering for years. Earlier this week, the Central Bank of Egypt auctioned $200 million to internal financial firms at 8.85 Egyptian pounds per dollar rather than the prevailing exchange of 7.73. The black market price of pounds has dropped precipitously of late, reaching nearly 10 pounds per dollar and suggesting that the central bank is being ripped toward devaluation by significant and sustained pressure.
The whole world is offering huge premiums in all sorts of formats, methods and expressions of "dollars" and yet "somehow" nobody wishes to offer them. If the US$ system were truly fine, then what a time to be a dollar owner. It seems to be, at the moment, the most valuable commodity around even when its form can be as disparate as a hugely negative basis swap to a loan to a cash-starved Egyptian company at 10 pounds to the dollar (funded at around 8). The world is the dollar's opportunity, so where are they all? This is exactly what the "rising dollar" means, where something in increasingly short supply leads not just to higher prices but actually increasing demand, too. In other words, a "short squeeze."
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