The demand for dollars is again driving xCcy basis swap spreads to wide levels, and to all-time low values for long swaps. This is driven by two distinct flows that both are a product of divergent monetary policies. Thou…
The demand for dollars is again driving xCcy basis swap spreads to wide levels, and to all-time low values for long swaps.
This is driven by two distinct flows that both are a product of divergent monetary policies. Though the flows are logical, they're hard to stop and in the end not optimal for the central banks.
Nordea Bank notes in a report on Tuesday:
As of right now there's no big logical flow that warrants paying the EURUSD xCcy basis - the main flows, i.e. both from the investor side and from the issuer side - doesn't look like stopping anytime soon.
Furthermore, though the current pricing is ultimately driven by monetary policies, a resurgence of risk premiums will tend to move the spreads in the same direction - wider.
Thus, if risk premiums increased as in 2011, the ECB medicine is prescribed and ready: their monetary policy having driven the dollar-price to the limit already.
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