The widening in US Libor - OIS spreads since Nov'17 and the concurrent move out in BBSW - OIS spreads suggests the US has driven the local widening and the US may have had some influence, but other factors appear to be driving the rise in BBSW, explains Prashant Newnaha, Senior Asia-Pacific Rates Strategist at TDS.
Key Quotes
“We believe Aussie repo is the primary driver dragging BBSW higher. Since the start of Q4'17, there has been a more persistent trend for secured lending, as measured by the RBA's OMO repo rate, to exceed the cost of unsecured lending, as measured by BBSW.”
“Increased offshore participation to fund longs via repo, the spike in the cost to borrow AUD via FX forwards into yr-end'17 and the Australian Bank Tax all appear to have a role in explaining the rising cost of balance sheet.”
“There has also been a clearer trend for repo to richen further in advance of the turn. With another two weeks to quarter end, the cost of unsecured borrowing should rise as the cost of secured lending increases. For repo to ease, Aussie bonds probably need to underperform.”
“The potential for Australian banks to increase domestic issuance (given the blowout in Libor-OIS makes it more expensive to issue in the US) could provide an alternative explanation for the rise in BBSW. An ongoing rise in Libor - OIS could also crowd out other issuers and warrant a rise in BBSW.”
“Our US Strategy colleagues expect FRA-OIS could be nearing a peak on slowing bill supply next month. This suggests the rise in BBSW could be nearing a peak too, but a broader structural risk for markets is repatriation of US corporate earnings. This could drive a renewed rise in BBSW.”
“AUD funding via FX forwards generally becomes more prohibitive into the turn. The significant widening in cross currency basis raised the cost of AUD funding into the end of 2017 but it is the rise in BBSW that is driving the current increase!”
“We find no strong evidence that Japan fiscal year end is having an impact on repo or FX forwards or money market spreads.”ith unsecured lending now trading above secured lending, and our US Strategy colleagues expecting US FRA-OIS could be peaking in the near term, this implies a retest of the highs in AUD cross currency basis is unlikely.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.