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/EGBS: BA/ML analyst Yuri..........>

US TSYS/RESEARCH
US TSYS/RESEARCH: /EGBS: BA/ML analyst Yuri Seliger cited an "early holiday
present for foreign investors" in FX basis action. "For foreign investors, the
cost of dollar funding across year-end has been elevated in recent years," he
said. "This is because many foreign banks measure capital levels at year-end and
thus are incentivized to reduce balance sheet assets."
- "While this excess demand for dollar funding has led to very negative
cross-currency basis swaps, quite unusually this week, we have seen material
improvement, likely as providers of dollar funding have reacted to attractive
levels and stepped in," they said. "For example 3-month cross currency basis
swaps, which constitute a large part of FX hedging costs, tightened 40bs and
22bps this week for EUR and JPY, respectively. Perhaps this is an early sign of
an expected looser regulatory regime for large US banks. Of course, further
improvement is likely starting on one of the last days in December when these
contracts no longer span year-end."

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