Investment Rating - The report does not explicitly provide an investment rating for the industry or assets discussed Core Insights - Uncertainty surrounding US tax and trade policy, along with significant US dollar weakness, suggests a potential global shift away from US dollar-denominated assets [1] - The cross-currency (XCCY) basis market can be utilized to gauge demand for US dollars and related assets, indicating a trend where investors show less interest in USD-denominated assets while favoring EUR and JPY assets [7][15] - The report anticipates that the tightening trend in the XCCY basis will persist until Federal Reserve rate cuts enhance the attractiveness of USD-denominated assets on a foreign exchange-hedged basis [16][97] Summary by Sections Executive Summary - In times of global market stress, investors typically seek safe haven currencies, with the USD historically reinforcing comfort in USD-denominated assets [8] - Post "Liberation Day" on April 2, 2025, the USD showed unusual depreciation against other currencies, raising questions about its safe haven status [11][68] XCCY Basis Market Dynamics - The XCCY basis reflects offshore demand for long-term USD funding and onshore demand for non-USD-denominated assets [7][14] - Recent movements in the XCCY basis indicate a reduced appetite for USD-denominated assets and an increased interest in EUR and JPY assets [15][16] - The report outlines key drivers of the XCCY basis, including supply and demand factors for both currencies, with negative spreads indicating a premium for borrowing USD [22][24] Key Drivers of XCCY Basis - Short-term drivers include USD liquidity, regulatory constraints, and demand for foreign assets, while medium- to long-term drivers focus on overseas asset demand and issuance-related factors [25][35][46] - The report emphasizes the importance of monitoring the XCCY basis as it provides high-frequency signals regarding foreign demand for USD and USD-denominated assets [65][77] Recent Market Observations - Following the announcement of reciprocal tariffs, negative CCY/SOFR basis swap spreads widened but quickly normalized, indicating limited investor flight to quality [78][82] - The report suggests that diminished demand for USD among offshore investors may be occurring, with US investors showing increased interest in overseas assets [85][96]