Betting on basis

Large offshore capital raising efforts by Australia’s banks and a relative dearth of activity in the kangaroo bond market has led to a significant widening in the cross-currency basis swap. This imbalance has created a large profit opportunity for fund managers. But can the party last? Wietske Blees reports

It has been a rollercoaster couple of years for the Australian cross-currency basis swap (see box, opposite), which has ripsawed to unprecedented levels primarily as a result of large irregular capital dislocations during the global financial crisis. On October 10, 2008, a shortage of US dollars, coupled with major rehedging of Japanese power reverse dual currency (PRDC) notes, caused the five-year AUD/USD cross-currency basis swap to drop to –50 basis points – quite a move for a swap that has