Abstract: The general search for U.S. dollars in forward currency markets, combined with the balance-sheet constraints of intermediary dealers, induces persistent failure of covered interest parity (CIP). We investigate these CIP deviations across the entire maturity spectrum by analyzing the daily dynamics of the USD/CHF crosscurrency basis curve. Applying functional principal component analysis, we identify three components that explain virtually all curve dynamics: a persistent, slowmoving level component, a temporary steepener, and a short-end component inducing sharp basis widenings and contractions around quarter-end dates. We provide empirical evidence that CIP-implied carry opportunities and U.S. monetary policy announcements widen the entire basis curve, whereas Fed swap line announcements tend to narrow it. During periods of global turmoil, the slope inverts in response to rising credit and capital stress among dealer banks, while funding stress steepens the curve as swap line usage mitigates short-end distortions. Reporting date effects, funding stress, and deteriorating market liquidity widen the basis primarily at the short- end. We further show that regulatory reporting dates generate systematic window-dressing distortions not only at the short end but also in the slope of the basis curve. This effect has weakened since 2022, which is consistent with recent changes in the regulatory landscape.

https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_09