Explanation
Since the 2007-2009 financial crisis, the cross-currency basis for most major currencies relative to the U.S. dollar (USD) has consistently been negative.
Key Reasons:
- USD funding premium: Global demand for USD funding has created persistent pressure
- Regulatory changes: Post-crisis regulations increased the cost of USD funding for non-US banks
- Safe-haven status: USD's role as a global reserve currency creates structural demand
- Basis swap mechanics: Negative basis means foreign currency borrowers pay a premium to access USD
Market Impact:
- EUR/USD and JPY/USD basis have been consistently negative
- Reflects the structural imbalance in global USD funding markets
- Has implications for multinational corporations, financial institutions, and arbitrage strategies
This persistent negative basis represents a breakdown of traditional covered interest parity that has become the "new normal" in post-crisis markets.
