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