DXY underwater on nonfarm payrolls, but, watch the Libor/ OIS spread

DXY has lost its mojo on the back of last week's wages in the finer details of the nonfarm payrolls. Short-term speculative positions have moved over to risk-on plays and that has left the dollar exposed below the 90 handle while a fourth 2018 rate hike from the Fed has been discounted out of the dollar. However, there are fundamentals at play that could signify otherwise and a higher dollar for a longer scenario.

Libor/ OIS spread implications?

There is a warning signal out there that warns that the banking sector is in trouble, known as the Libor/OIS spread. The spread has moved out to the widest since 2012, (it broke above its 6-year range on Friday, when the USD Libor-OIS spread jumped 2bps, rising to 44.23bps), and investors are looking to the European banking sector again.  

Casting minds back to 2012, this was the widest this key spread has been since January of that year when the latest European sovereign debt crisis was in play and when the Fed had to open unlimited swap lines with the rest of the world to avoid a global dollar funding crisis.

Nothing systemic to startle the markets at this moment and perhaps more technical than anything, but the interbank market is getting cautious on lending over longer periods of time and an element of fear is stalking the sector again.

What this means for FX markets is a little complicated, but essentially, it means higher borrowing costs and rates in a credit market that is already highly short the dollar, (to the tune of over $10 trillion according to BIS) and thus could make for a squeeze on speculative positions in the first instance; I.e. a higher dollar while the Fed is already shrinking its  $4.4 trillion balance sheet, meaning banks are going to have to compete more for funding, forcing short-term rates higher. DXY is heavily weighted to the euro and thus if all eyes are on the European banking sector, DXY goes bid.

DXY levels

On a yearly basis, 90.20, 90.44, 90.52 and 90.97 are resistances (92.52 on the wide YTD high), and 89.61, 89.10 ahead of 88.59 comes as supports. 88.253 - 101.790 is the 52-week range.