EURUSD Basis Showing Signs of Stress in USD Funding Markets (1/2)

There has been a substantial and notable widening of the EURUSD basis swap spread over the past few days, with today seeing the 3-month spread widen by over 20bps.

• In non-stressed conditions, the 3-month spread is normally between -10 to -20bp, and a negative basis means it is more expensive to borrow dollars through FX swaps than domestically.
• There is demand to borrow dollars largely for currency hedging purposes with banks willing to supply dollars. However, both in stressed conditions and towards year-end, banks tend to become cautious about their lending. In the former to reduce risk and in the latter to present a balance sheet with reduced risk.
• The moves seen over the past few days in the EURUSD basis have seen the spread widen to around -48bps at the time of writing. This is similar to the levels reached around year end. However, it is notable that we are a long way from the -200bps levels seen intraday in March 2020 when Covid-19 levels initially spooked markets.