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At Any Rate
Global Rates: What drives European cross currency basis?
Jan 24, 2025
Khagendra Gupta, an Analyst at J.P. Morgan Global Research with a keen focus on cross-currency basis markets, dives deep into European cross currency dynamics with host Francis Diamond. They unravel the complexities of the euro-US dollar basis, discussing how short-term flows and Yankee bonds play a role. Gupta also sheds light on how central bank policies, particularly those of the Federal Reserve and the Bank of England, influence market conditions, hinting at potential shifts in the basis curve. A fascinating exploration of global finance!
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Quick takeaways
- The European cross currency basis reflects the relative scarcity of USD funding, influenced by interest rate differentials and central bank dynamics.
- Current positive euro-dollar basis trends are driven by tactical market movements rather than fundamental funding dynamics, highlighting complex cross-border capital flows.
Deep dives
Understanding Cross-Currency Basis
Cross-currency basis reflects the premium required to borrow a dollar compared to domestic currencies, indicating the relative scarcity of USD funding. A widening basis signals increasing costs associated with dollar borrowing, often influenced by interest rate differentials and central bank dynamics. Historical examples include significant basis fluctuations during the Lehman crisis and the 2011 sovereign debt crisis, where obtaining USD became increasingly difficult. It is crucial to evaluate whether specific economic drivers lead to scarcity or abundance of USD to predict movements in the basis effectively.
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