巴黎银行-全球-外汇策略-2019年欧元兑美元基本面展望-20190220-28页_2mb

EUR/USD XCCY Basis 2019 Outlook Summary

Core Content

This document provides an analysis of the EUR/USD cross-currency basis (XCCY) for 2019, focusing on factors that influence its movement, including central bank policies, credit market dynamics, and cross-border issuance trends. The overall conclusion is that the EUR/USD XCCY basis has potential to rise further in 2019.

Main Drivers of Tightening

• USD OIS/BOR Spreads:

  • The OIS/OIS XCCY basis has returned to its mean sensitivity to USD OIS/BOR spreads.
  • The potential for tighter USD OIS/BOR spreads is supported by the early end to Fed balance sheet normalization and declining T-bill issuance.
  • The spot 3m Libor/SOFR fallback has averaged 24-26bp, aligning with current OIS/OIS levels (1y at 26.5bp, 5y at 28bp, 10y at 29.5bp, 30y at 30bp).
  • The USD OIS/BOR curve is expected to remain tighter due to the MMF reform and structural changes in USD funding patterns.

• Fed vs ECB Balance Sheet Normalization:

  • The Fed is expected to end its balance sheet normalization as early as summer 2019, when reserves fall to USD1.2–1.4trn.
  • The ECB is expected to keep its balance sheet unchanged, with a new TLTRO potentially maintaining excess liquidity at current levels.
  • The relative pace of Fed balance sheet reduction compared to ECB's stability will support a tightening in the XCCY basis, with the annual change in Fed balance sheet versus ECB's expected to rise from -14% to -5%, contributing to a 4bp rise in the basis.

• Credit Market Dynamics:

  • US credit is expected to outperform EUR in 2019 due to the Fed's more dovish stance on rates and balance sheet normalization.
  • The ECB's 'wait and see' approach contrasts with the Fed's more active policy shift.
  • Credit weakening in late Q4 2018 is expected to reverse with the end of quantitative tightening, supporting a tighter XCCY basis.

Cross-Border Issuance Trends

• Reverse-Yankee Issuance:

  • The US Tax Cuts and Jobs Act 2017 led to a significant drop in reverse-Yankee issuance, contributing to the tightening of the XCCY basis in 2018.
  • Reverse-Yankee issuance bounced back in January 2019, but remains below historical levels.

• Yankee Issuance:

  • Yankee issuance outside the eurozone reached record highs in 2019, but we suspect that multi-tranche deals in USD were not swapped, which could bring issuance levels back to average.

• Net Supply:

  • Net supply (USD supply by eurozone entities - EUR supply by non-eurozone entities) has historically shown seasonal patterns, with tightening in late January and early March, and widening in mid-February.
  • The unusual widening in January 2019 suggests that the typical seasonal tightening in early March may not occur this year.

Seasonality Analysis

• The 5y EUR/USD XCCY basis historically tightens in early January, mid-February, and late March, and widens in mid-February and late October/November.
• The current seasonality pattern suggests a potential tightening in early March, which would align with the expected narrowing of the XCCY basis due to the Fed's slower normalization and ECB's stable liquidity.

Impact of Benchmark Reform and ISDA Fallbacks

• The transition to RFR (Risk-Free Rate) benchmarks (such as SOFR and ESTER) is expected to reshape the XCCY basis market.
• The estimated impact of ISDA fallback methodologies on the EUR/USD XCCY basis is:
  • 5y: +1bp
  • 10y: +3bp
  • 30y: +7bp
• These changes are expected to contribute to a flattening of the XCCY basis curve, with the long-term trade idea of paying the 3y2y basis and receiving the 10y20y basis.

Trade Ideas

• Long-term Trade: Pay 3y2y EUR/USD XCCY basis vs receive 10y20y (entered at 32bp on 5 September 2018; target: 15bp; carry: +3.5bp/year; current: 29bp).

Key Information

• Relative Funding Costs: Have returned to neutral, with the potential for a slight tightening ahead.
• Credit Market Outlook: US credit is expected to outperform EUR in 2019 due to the Fed's more dovish stance.
• Central Bank Policies: The Fed's balance sheet normalization is expected to slow, while the ECB's policy remains stable, supporting a tighter XCCY basis.
• Seasonality: The basis is expected to tighten in early March, but the unusual widening in January reduces the likelihood of a typical seasonal tightening in February.
• Benchmark Reform: The shift to RFR-based benchmarks is expected to impact the XCCY basis, particularly at the longer end, with an estimated 10y ESTER/SOFR xccy basis quoted at -31bp.

Conclusion

The EUR/USD XCCY basis is expected to tighten further in 2019, driven by the Fed's early end to balance sheet normalization, ECB's stable liquidity, and US credit outperformance. The benchmark reform and ISDA fallback methodologies could also play a role, especially at the longer end of the curve. The seasonal patterns and cross-border issuance trends support the view that the basis will remain relatively tight throughout the year.