Year-end widening in yen-dollar basis swap expected to be more contained - BofA

The firm's chief rates strategist in Tokyo, Shuichi Ohsaki, says that the seasonal widening in yen-dollar 3-month cross currency basis swap is expected to be contained, thus not really reflecting strong demand for dollars by Japanese players.

 

Adding that dollar funding is currently ample and expectations that banks can tap into the Fed's dollar swap lines - if and when necessary - and turn to the BOJ for help may help ease the pressure on funding costs.

 

It makes sense to argue for such conditions considering what the Fed has done since March to ensure that the market has sufficient dollars.

 

In this case, we might not see the usual rush into the dollar around late September to October as we did back in 2018 and 2019. But amid the potential for a liquidity squeeze if stocks get crushed, imminent dollar demand can't be ruled out just yet.

 

For now, we are at that crossroads and figuring it out with US election risk a key factor alongside recent virus developments across the globe.