Cross-Currency Basis Views 2026 Outlook and Strategy

Mizuho predicts a year of continued tightening across major cross-currency basis spreads in 2026, driven by abundant US dollar liquidity, bank deregulation, and robust cross-border issuance.

Key Takeaways

• 1.USD liquidity is expected to remain abundant in 2026, driven by a potentially dovish new Fed Chair, bank deregulation, and the Fed's readiness to support funding markets via Treasury bill purchases.
• 2.The USDJPY XCCY basis is expected to continue tightening, supported by foreigner demand for JGB ASW and high reverse samurai issuance.
• 3.BoJ policy is shifting structurally, with Mizuho forecasting a gradual hike toward a 2% terminal rate by 2028, which acts as a paying driver for JPY basis.

Table of Contents

• The USD market: abundant USD liquidity to stay
• Fed: wait-and-see until the new Chair starts?
• US funding markets: The Fed is ready to keep liquidity flowing
• Bank deregulation as another paying driver in major XCCY basis spreads
• What about FX Lines?
• USDJPY XCCY basis: still paying
• JGBs likely to steal the show
• The other side of the demand: chasing JGBs and JPY SSAs swapped supporting the tightening
• Another likely stellar year for Reverse Samurais (more paying)
• BoJ hiking to 2% terminal? Another paying driver
• EURUSD XCCY basis: finding the ceiling; steeper curve
• Supply angle: Déjà vu but without the Liberation Day widening
• Demand side: Italy and France can bring some paying flows but risks increase into 2027 elections
• Steepening of the EURUSD XCCY curve
• GBPUSD XCCY basis: tighter and with room to steepen further
• Demand side: Is 2026 the year of the Gilt trade? Normalization of the GBPUSD XCCY curve incoming
• Supply angle: GBP popularity putting a lid on how much it can tighten?
• Monetary policy divergence: the ultimate paying driver
• Our special guests: USDCHF, USDZAR, EURNOK and EURSEK

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