Recent Trends in Cross-currency Basis

Fumihiko Arai, Yoshibumi Makabe, Yasunori Okawara and Teppei Nagano
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Fumihiko Arai: Bank of Japan
Yoshibumi Makabe: Bank of Japan
Yasunori Okawara: Bank of Japan
Teppei Nagano: Bank of Japan

No 16-E-7, Bank of Japan Review Series from Bank of Japan

Abstract: The cross-currency basis, which is the basis spread added mainly to the U.S. dollar London Interbank Offered Rate (USD LIBOR) when the USD is funded via foreign exchange (FX) swaps using the Japanese yen or the euro as a funding currency, has been widening globally since the beginning of 2014. This development is driven by (1) increased demands for U.S. dollars resulting from a divergence in the monetary policy between the U.S. and other advanced countries, (2) global banks' reduced appetite for market-making and arbitrage due to regulatory reforms, and (3) the decrease in the supply of U.S. dollars from foreign reserve managers/sovereign wealth funds against the background of declines in commodity prices and emerging currency depreciations.

Date: 2016-09-09
New Economics Papers: this item is included in nep-cba, nep-mon and nep-sog
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