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Recent Trends in Cross-currency Basis

Author

Listed:
  • Fumihiko Arai

    (Bank of Japan)

  • Yoshibumi Makabe

    (Bank of Japan)

  • Yasunori Okawara

    (Bank of Japan)

  • Teppei Nagano

    (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.

Suggested Citation

  • Fumihiko Arai & Yoshibumi Makabe & Yasunori Okawara & Teppei Nagano, 2016. "Recent Trends in Cross-currency Basis," Bank of Japan Review Series 16-E-7, Bank of Japan.
    • Handle: RePEc:boj:bojrev:rev16e07
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    File URL: http://www.boj.or.jp/en/research/wps_rev/rev_2016/data/rev16e07.pdf
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    Citations

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    Cited by:

    1. Angrick, Stefan & Nemoto, Naoko, 2018. "Breaking Par: Short-Term Determinants of Yen-Dollar Swap Deviations," ADBI Working Papers 859, Asian Development Bank Institute.
    2. Dagfinn Rime & Andreas Schrimpf & Olav Syrstad, 2017. "Segmented money markets and covered interest parity arbitrage," BIS Working Papers 651, Bank for International Settlements.
    3. Gino Cenedese & Pasquale Della Corte & Tianyu Wang, 2021. "Currency Mispricing and Dealer Balance Sheets," Journal of Finance, American Finance Association, vol. 76(6), pages 2763-2803, December.
    4. William A. Allen & Gabriele Galati & Richhild Moessner & William Nelson, 2017. "Central bank swap lines and CIP deviations," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(4), pages 394-402, October.
    5. Gustavo Adler & Carolina Osorio Buitron, 2020. "Tipping the scale? The workings of monetary policy through trade," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 744-759, August.
    6. Gee Hee Hong & Anne Oeking & Kenneth H. Kang & Changyong Rhee, 2021. "What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia?," Open Economies Review, Springer, vol. 32(2), pages 361-394, April.
    7. Ibhagui, Oyakhilome, 2021. "Stock market and deviations from covered interest parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    8. Petra Gerlach-Kristen & Richhild Moessner & Rina Rosenblatt-Wisch, 2018. "Computing Long-Term Market Inflation Expectations for Countries without Inflation Expectation Markets," Russian Journal of Money and Finance, Bank of Russia, vol. 77(3), pages 23-48, September.
    9. Oyakhilome Ibhagui, 2021. "Inflation differential as a driver of cross-currency basis swap spreads," The European Journal of Finance, Taylor & Francis Journals, vol. 27(6), pages 510-536, April.
    10. Han, Bo, 2022. "Currency denomination and borrowing cost: Evidence from global bonds," Journal of Multinational Financial Management, Elsevier, vol. 66(C).
    11. Yoichi Ueno, 2017. "Term Structure Models with Negative Interest Rates," IMES Discussion Paper Series 17-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    12. Mayu Kikuchi & Alfred Wong & Jiayue Zhang, 2019. "Risk of window dressing: quarter-end spikes in the Japanese yen Libor-OIS spread," Journal of Regulatory Economics, Springer, vol. 56(2), pages 149-166, December.
    13. Dušan Staniek, . "Cross-Currency Basis Spread and Its Impact on Corporate Lending Rates in the Czech Banking Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 0.
    14. Gee Hee Hong & Anne Oeking & Kenneth H. Kang & Changyong Rhee, 2021. "What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia?," Open Economies Review, Springer, vol. 32(2), pages 361-394, April.
    15. William A. Allen & Gabriele Galati & Richhild Moessner & William Nelson, 2017. "Central bank swap lines and CIP deviations," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(4), pages 394-402, October.

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