Bank of America Global Research warns of the scope of a tightening USD funding market into year-end.
"In March, liquidity supply through USD swap lines was improved, but perhaps because financial markets were relatively stable and demand was low, the number of USD fund supply operations declined and the outstanding use of USD swap lines greatly declined. As we head toward normal times, amounts outstanding will probably decline further. The amount of USD fund supply operations extended to the BoJ is large, so attention might focus on the course of USD fund demand from the Japanese and USDJPY basis spread movements," BofA notes.
"The market has been calm recently, but as support from central banks diminishes, supply-demand could tighten again at yearend. If so, the risk of USD appreciation and higher USD interest rates would increase, not a desirable situation for the Fed. Therefore, the supply of USD through USD swap lines appears likely to increase again," BofA adds.