The Bank of China has stopped FX forwards and swaps trading with several large European banks, according to sources. This is a worrying development because US Money Market Funds have already helped to cause liquidity problems with European Banks by cutting European exposure to French Banks. These are all inevitable signs of negative sentiment which manifest themselves in this chart which is the extra cost of swapping euro interest payments for dollars. Essentially, it goes up as the demand for dollar liquidity goes up...
Euro Swap Five Year Spread
…and now the report on the Bank of China’s actions..
'Bank of China, a big market-maker in China's onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, three sources with direct knowledge of the matter told Reuters on Tuesday.The European banks include French lenders Societe Generale Credit Agricole and BNP Paribas and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said'
…will only raise stress further.
It is worth pausing and reflecting that before the recent Italian Bond Auction, the Italians were keen to confirm that they had been talking to the Chinese over ‘selling debt’. This blog was vocal in being critical of this pseudo ramp in an article linked in here, and this sceptical approach has been confirmed by this latest news.