In the intricate world of foreign exchange and bond markets, movements in cross currency basis can signal significant shifts in investor sentiment, market liquidity, and underlying economic fundamentals. One such instance has been observed recently, where the widening in the EURUSD cross currency basis appears to be predominantly influenced by an influx of EUR supply. This phenomenon has been particularly notable on Monday, with a substantial volume of new issuances from North American entities taking the spotlight.

At the forefront of this surge in supply are sizable offshore deals from prominent financial institutions. Morgan Stanley emerged with a multi-tranche issuance amounting to EUR 5 billion, while JPMorgan followed suit with a EUR 2 billion issuance, structured as a 10-year with a 9-year non-call period (10NC9). These transactions represent the largest offshore deals of the day, reflecting a robust appetite for euro-denominated debt among North American issuers.

Adding to the mix are other notable issuers such as the Province of Quebec and HSBC, further amplifying the volume of EUR supply in the market. This flurry of activity underscores a strategic push by North American names to tap into the eurozone’s debt market, possibly seeking to capitalize on the prevailing interest rate differentials or to diversify their investor base.

The influx of EUR supply has had a tangible impact on the EURUSD cross currency basis, a key metric that measures the cost of swapping EUR into USD without exchange rate risk. Specifically, the basis for 10-year swaps has narrowed by 0.625 basis points (bp), indicating a relative increase in the cost of converting euros to dollars. This movement suggests a tightening in liquidity for euro funding, as the market absorbs the new issuance.

Moreover, the dynamics of the day’s trading have revealed a continued interest to sell at these levels, hinting at a bearish sentiment among investors towards the EURUSD cross currency basis. However, it wasn’t entirely one-sided; there has been a notable interest from “fast money” – or speculative investors – in unwinding received positions, possibly taking advantage of the basis movement for quick gains.

Adding another layer to the market’s complexity is Société Générale’s USD benchmark issuance, which may be exerting upward pressure on the EURUSD cross currency basis. This suggests that demand for USD assets remains strong, potentially limiting the downward movement in the basis.

The recent widening in the EURUSD cross currency basis underscores the intricate interplay between supply and demand dynamics in the global bond markets. With a significant push from North American issuers into the euro-denominated debt space, the market is witnessing shifts that could have broader implications for currency and interest rate markets. As investors navigate this evolving landscape, understanding the drivers behind such movements will be crucial for making informed decisions. Whether this trend will persist hinges on various factors, including future issuance patterns and shifts in global economic indicators.