discussion: avdjiev, du, koch and shin (2017): «the dollar, bank … · 2017-05-30 · farooq...

Discussion: Avdjiev, Du, Koch and Shin (2017):«The dollar, bank leverage and the deviation…»

Farooq Akram

BIS Symposium, May 2017

Disclaimer: Views expressed should not be interpreted as reflecting those of Norges Bank.

The Triangle Stronger dollar widens CIP-devs and contracts XB-dollar lending

XC-Basis XB-$ lending

USD

Generality and interpretation of results?

3

Suggested relationships based on general arguments/model

Focus on:

Empirical validity of relationships over time, interest rates data?

Empirical validity of relationships across countries/currencies?

Is there an alternative interpretation of data?

Dollar and cross-currency basis

4

Correlation absent pre-crisis, appears post-crisis

-80

-60

-40

-20

0

20

0.6

0.8

1.0

1.2

1.4

2000 2002 2004 2006 2008 2010 2012 2014 2016

EURUSD 5y basis swapUSDEUR spot (higher values=stronger USD)

Need to look for post-crisis factors

5

Deviations and correlation emerge post-crisis

What has changed since the crisis?– ….financial regulations and transactions costs

– risk-conciuosness, and risk premia

– Monetary policies: ZLB, QE,…

Unconventional policies behind unconventional deviations and correlations?

The XC-basis and the credit spreads- reflects their gap?

0.0

0.2

0.4

0.6

0.8

1.0

1.2

-60

-50

-40

-30

-20

-10

0

10

I II III IV I II III IV I II III IV

2004 2005 2006

Credit spreads in EUR (financials 5-7 years, Barclays index)Credit spreads in USD (financials 5-7 years, Barclays index)EURUSD basis swap 5y (rhs)

0.4

0.8

1.2

1.6

2.0

2.4

-60 -50 -40 -30 -20 -10 0 10

I II III IV I II III IV I II III IV

2014 2015 2016

Credit spreads in EUR (financials 5-7 years, Barclays index)Credit spreads in USD (financials 5-7 years, Barclays index)EURUSD basis swap 5y (rhs)

XC-Basis largely reflects credit spread gap?

Source: Syrstad (2017)

Central banks’ balance sheets and spreads?

0.4

0.8

1.2

1.6

2.0

2.4

-60 -50 -40 -30 -20 -10 0 10

I II III IV I II III IV I II III IV

2014 2015 2016

Credit spreads in EUR (financials 5-7 years, Barclays index)Credit spreads in USD (financials 5-7 years, Barclays index)EURUSD basis swap 5y (rhs)

Source: Syrstad (2017)

Central banks’ balance sheets and dollar?

9

Source: Syrstad (2017)

Central bank policies behind USD and Basis ?

XC-Basis XB-$ lending

CB policies USD

?

Strong dollar or fall in commodity prices?

11

4 commodity currencies in the sample; (NOK, CAD, AUD, NZD)

Strong dollar, fall in dollar-denominated commodity prices

Fall in commodity prices, strong dollar bilaterally

Two negative shocks to banks’ balance sheets in commodityproducers

Overstate the importance of dollar for banks equity and fundingconditions in commodity producers?

Strong dollar, fall in commodity prices

12

Source: Naeimi (2013)

Fall in commodity prices, strong $ bilaterally

13

Dollar and commodity producers

14

Mixed results for commodity currencies

When substantial revenues in USD and costs in local currency, strong dollar eases funding conditions for borrowers, and theirbanks?

Outweigh the effects of fall in commodity prices on banks’ equityand funding conditions?

Explain why the results for commodity currencies are mixed?

Strong dollar good for commodity producers?

15

An alternative interpretation of results?

XC-Basis XB-$ lending

CB policies USD

?

Commdity prices

+/- ?

In summary

17

An important paper with many interesting and striking results

Robust to extensions of information set?– Other interest rates data– Unconventional policies– Commodity prices.

Appendix

18

Similiarly in the case of yen…

Source: Syrstad (2017)

Funding costs, spot and BOJ Balance sheet

«Funding uncertainty» and VIX

21Source: Larsen (2017)

Strong USD raises funding uncertainty?

22

«Funding uncertainty» count in Norwegian business daily (DN)

Source: Larsen (2017)