A key measure of dollar funding strains for eurozone banks widened on Thursday, as the supply of greenbacks to money markets remained scarce relative to the massive boost to euro liquidity from the ECB. Traders said the banks' usual higher cash needs before the end of the year were delaying any improvement in interbank markets after the European Central Bank pumped almost half a trillion euros in three-year loans on Wednesday.
The euro/dollar cross currency basis swap, which widens when lenders charge more for swapping euro interest payments on an underlying asset into dollars, expanded across the curve. "Banks will take the euros and swap it back into dollars in the 3-year maturity, widening the basis. That seemed to drag the front end of the curve along with it," said Ciaran O'Hagan, rate strategist at Societe Generale. Long-term euro financing from the ECB followed by a dollar swap is one way for banks to offset a US money market funds exodus from Europe, but they also have unlimited one-week and three-month dollars available with the ECB via its swap line with the Federal Reserve.
The three-year euro/dollar FX basis swap was last minus 78.25 basis points, some 5 basis points wider from levels seen before the ECB tender. The three-month swap was about 15 bps wider from before the euro injection at minus 135 bps. The massive liquidity injection and the prospects of a large take-up of new three-year ECB funds in February should keep overnight EONIA rates at levels close to the deposit facility rate at 0.25 percent.
Some technical analysts also recommend buying March Euribor, which they say it is on a tentative rising trendline and could test the September highs at 99.07, compared to 98.83 currently. The three-month euro London Interbank Offered Rate, or Libor, fell to 1.33929 percent from Wednesday's 1.34571 percent. The dollar Libor rate, however, rose to 0.57375 percent from 0.57125 percent.