New Funding Crisis Emerges As Soaring Dollar Demand Slams Gold, Drives Cross-Currency Basis Lower

This week has been different for precious metals…

Spot gold is currently down -8.5% for the week, which is the worst week since March 2020, but it was earlier down -10%, which would have been the worst week since 1983…

Notice that the big legs lower in gold this week have occurred during the Asia and European session.

Which got us thinking… 

Is gold the canary in the coalmine of a dollar funding crisis?

As we warned earlier in the week, we are seeing strains begin to emerge in the global financial system’s plumbing.

UBS traders noted sizable moves in JPYUSD and CHFUSD X-ccy basis suggesting rising demand for dollars..

If there’s a dollar shortage, people will sell gold first.

And in case you were wondering, this is why Asia could be where the funding crisis is emerging…

And don’t forget, China does not have an LNG stockpile (and prices are up over 100% in Europe)…

Swap spreads (another arcane signal of potential stress in the market’s funding channels), are pushing notably wider…

All we need now is a funding crisis (though it may force The Fed’s hand to slash rates).

And talking of Fed cuts, the market is now pricing in no rate-cuts from The Fed this year…

…but, as Bloomberg reports, a couple of decent sized upside flows seen in SOFR options in recent trading, which look to cover tail-risk hedge of up to two 25bp rate cuts from the Fed over the coming weeks.

Why would that happen?

So far, no one has reached for help from The Fed…

Time for someone to ‘panic first’ (and this with The Fed doing $40BN on ‘Not QE’?