Cross-Currency Basis Views Outlook and Strategy

Mizuho EMEA's 2026 outlook predicts a continued tightening of major XCCY basis spreads (USDJPY, EURUSD, GBPUSD) as abundant USD liquidity and central bank divergence erode the historical dollar premium. Strategists anticipate record issuance years and policy shifts like US bank deregulation will act as primary drivers for these basis moves.

Key Takeaways

• 1.USD liquidity is expected to remain abundant in 2026 due to Fed intervention and potential bank deregulation, continuing the cheapening of the dollar premium.
• 2.USDJPY XCCY is expected to tighten further (stay 'paying') driven by JGB asset swaps and reverse samurai issuance, with a potential 2% BoJ terminal rate acting as a tailwind.
• 3.EURUSD XCCY basis tightening is likely to meet a ceiling as EUR issuance becomes attractive, leading Mizuho to favor steepeners in the 5s30s curve.

Table of Contents

• 2026: Will XCCY firmly flip from showing a USD premium to showing a discount?
• 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: expect Japanese investors interest in foreign bonds to remain limited
• 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: It's taking its time, but we still hold that view
• 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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