Traders or Commodity Finance Banks pt. XXIV: -The American Dollar Commodity, an Harbinger of the Risk-Capacity in the Swiss-based Commodity Sector.Guest Post
If money is a commodity, the American dollar is the best brand in this world (this is not an understatement). The sharp appreciation of the dollar coinciding with a large (negative basis) on other currencies takes on the attributes of a risk-capacity indicator for the commodity trading and finance sector. Dollar shortages in the FX market, have been the fundamental driver both during and long before the recent period of pandemic-induced stress in the global markets.
$100M exchanged fully-hedged and collateralized by 100M CHF for 3-months. Credit is zero; In a fair world the basis is zero.
When the USDCHF currency basis swap 3-month bid -117bps versus buying a 2-Year Treasury yield of 0.22%, this should be a pretty attractive trade.
Those who have the dollar currency (banks-dealers) can “arbitrages”, but instead their bid is low and falling (MM, or their credit cost is rising).
Why don’t they simply lend or trade ? -Because of one extremely important word: Capacity.
Banks (on the supply-side) have into their clients banks/FICC and/or major funding participants. When credit recedes, these dealers costs are higher than the market thinks.
How important do you reckon the relationship (negative basis/rising dollar) is for the risk-capacity in Swiss commodities sector ?
SNB BoPs surveys have shown that the Swiss-Commodity based industry requires between 3 and 3.5 billion in dollars equivalent a month. Think of the soaring dollar cost as a king’s ransom on the arbitrage.
I have bad news.
I. Low/declining libor rates, are a fallacy. They are not the harbinger of any credit cheapness and they don’t measure the trader/bank capacity (e.g. both the capacity for a trader to fund the libor itself or of a bank to lend).
III. 2/3 of the Traders and Merchants are at risk to disappear in the coming months and it should be the same predicament for those in the arcane of commodity financing, no exception.
“Soft-Commodities, a Carry-trade Made And Killed”
While the commodities supply & demand imbalances (ex: Gold ETF hoarding, Oil) might entice the participants to arbitrage until the spot-forward price parity is re-established no matter how attractive a trade might be, if you don’t have the dollar then you can’t play.
Arbitrages in the commodity markets can exist longer than you think by the virtue of financing constraints, (e.g. the tendency of a rising dollar to dampen dealer`s banks intermediation capacity).
Jacques S. Structurer