Europe Confronts Rising Competitive Pressure as China Accelerates Export-Led Growth 
Gold Prices Slide as Rate Cut Prospects Diminish; Copper Gains on China Stimulus Hopes 
U.S. Productivity Growth Widens Lead Over Other Advanced Economies, Says Goldman Sachs 
Stock Futures Dip as Investors Await Key Payrolls Data 
Ethereum Ignites: Fusaka Upgrade Unleashes 9× Scalability as ETH Holds Strong Above $3,100 – Bull Run Reloaded 
Goldman Predicts 50% Odds of 10% U.S. Tariff on Copper by Q1 Close 
UBS Projects Mixed Market Outlook for 2025 Amid Trump Policy Uncertainty 
Lithium Market Poised for Recovery Amid Supply Cuts and Rising Demand 
U.S. Banks Report Strong Q4 Profits Amid Investment Banking Surge 
Gold Prices Fall Amid Rate Jitters; Copper Steady as China Stimulus Eyed 
Bitcoin Defies Gravity Above $93K Despite Missing Retail FOMO – ETF Inflows Return & Whales Accumulate: Buy the Dip to $100K 
U.S. Black Friday Online Spending Surges to $8.6 Billion, Boosted by Mobile Shoppers 
The policy rotation in the US should favor a further appreciation of the US dollar in 2017. This tends to undermine both USD lending to non-US borrowers and international FX reserves, two factors that will probably amplify the dollar scarcity.
On top of that, the Fed outlook for H1’17 is now more uncertain, with risks of a more hawkish tone ahead. All this supports some basis widening, which could accelerate on sizeable EUR offshore issuance in Q1.
In Europe however, expectations of PSPP tapering and higher EUR rates will eventually favour tighter bases. We would therefore consider tighteners in EUR, but vs GBP, on expected further Brexit-led risk aversion.
2016 has seen the EURUSD cross-currency basis reaching its most negative levels since the sovereign crisis. This mostly reflects a greater imbalance in supply/demand for US dollars.
As we note below, the supply of US dollars has been hampered by tighter bank lending and declining international FX reserves in recent years, both on the back of an appreciating currency (USD) and lower oil prices. Demand on the other side has been intense, especially from Japanese banks that face substantial liabilities in USD terms.
Liquidity has also become an ever-greater issue. Banking regulations have made balance sheet expansion very costly for banks. As a result, market participants are no longer able to fade the arbitrage induced by the loss of covered interest parity in bases. This is a radical change in comparison to the pre-2008 world.
Reduced liquidity, as a consequence of the more recent regulations, is set to leave the basis ‘open’ at negative levels in the long run.
Recommendations:
Turn on receivers in 2Y2Y EURUSD versus payers in 2Y @ 4bp. Target -11bp. Stops 13bp.
Turn on receivers in 5Y5Y GBPEUR @ 36.5bp. Target 18bp. Stops 46bp.
