Thoughts on the fx swap lines data releases

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>   (email exchange)
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>    On Thu, Dec 2, 2010 at 3:51 AM, Mike wrote:
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>   It seems it was around 7 trillion notional. Do you know the durations?
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No, haven’t read any details. I recall they were relative short but were extended maybe more than once.

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>   If they didn’t act would the entire fx market have come to a halt.
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Libor setting would have been higher for as long as the BBA kept the weaker banks in the basket.

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>   Given that this lending is unsecured, what happens if a foreign central bank doesn’t pay?
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The lender has no recourse and takes a loss.

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>   Are there any constraints on this lending?
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Just political. A nation can lend, spend, or toss down a rat hole any amount of it’s own currency it wants.

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>   Finally, would clearing all fx swaps have prevented the fx “run” if the fed had
>   backstopped the clearinghouses?
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Not sure which ‘run’ you are referring to?

But getting short a currency, spot or forward, means you are borrowing it, directly or indirectly, and none of the currencies in question are ever ‘quantity constrained’. What triggered the swap lines was the desire of the Fed to get libor settings lowered.

The large dollar borrowing funded by the Fed swap lines was done because foreign banks with presumed credit issues were bidding up libor and driving up the libor settings which was driving up home mortgage and other rate settings in the US. The Fed brought the rates down by facilitating lending at lower rates to those weaker credits via the ECB and other CB’s. (That would have been my last choice on how to get those US rates down, but that’s another story.)

Does this help?

Inflation in China

What I see is more evidence of an inflation problem in China that they are now trying to blame on something other than themselves to prevent the historical regime change from inflations of the past.

The problem is, of course, the don’t fundamentally understand how a currency works, which reduces the odds of being able to reverse their inflation without a recession.

Beijing’s Focus on Food Prices Ignores Broader Inflation Risk

By Keith Bradsher

November 17 (NYT) — Zhou Xiaochuan, the governor of the central bank, had said earlier on Tuesday that the amount of money racing through the global economy was putting pressure on emerging economies that want to control inflation. And Yao Jian, a commerce ministry spokesman, said at a press conference on Tuesday that the government would tighten scrutiny of foreign investment so as to prevent too much money from pouring into China as foreign investors seek higher returns than are currently available in the West.

Imposing price controls and other administrative controls on the Chinese economy runs counter to the steps recommended by many Western experts. They have suggested that China should further deregulate its economy, let the renminbi appreciate and otherwise rely on market forces to tame inflation.