At Any Rate Global Rates: What drives European cross currency basis?
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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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Cross-Currency Basis Explained
- Cross-currency basis reflects the premium paid to borrow dollars against another currency.
- It essentially compares borrowing premiums between two currencies.
Basis Drivers
- Dollar scarcity increases the dollar borrowing premium, widening the basis (more negative).
- Factors like interest rate differentials and central bank balance sheets drive basis.
Historical Basis Widening
- The Euro-dollar basis widened during the Lehman Brothers collapse and the 2011 sovereign debt crisis.
- These events highlighted the premium placed on holding USD during times of crisis.