FxWirePro: Euro Rates Strategy ahead ECB's Meeting
Euro’s strength – considerably EUR/USD has appreciated by almost 1.13% since last Thursday.
In view of general USD weakness and in view of general risk-on sentiment on the FX market that is not a move that would require any EUR positive reasons.
Even on the day before the ECB Meeting monetary policy in the euro zone is not an issue for the FX traders.
First of all the European central bankers will have to implement the measures decided in March. They have to present a detailed plan of how they are going to be implemented. In other words, we must not expect the ECB to do anything at all (apart from some rhetoric).
Subsequently, the EONIA curve bull flattened on market pricing further scarcity premium at the long and ultra-long end of the curve.
Q1 was driven by the projections of ECB insistently easing deposit rates further into negative territory. While we do not rule out further cut, we believe that expectations around further depo cut will take a backseat in Q2.
Q2 will be driven by ECB’s accelerated balance sheet expansion. We project it to reach €4tn by March 2017 on the back of upsized asset purchases and solid uptakes at the upcoming TLTROs II.
Low front end volatility is likely to support carry trade but on risk adjusted basis we see limited opportunity.
Stay long Jun16 as a cheap option on further easing, go in reds EONIA and switch into long 2Yx2Y real EONIA yields.
Pay golds EONIA in the blues/golds/purples EONIA fly on expected positive convexity and keep paying 10Y in the 5s/10s/20s swap butterfly.
Hedge against the ECB removing the constraint of not buying below the depo floor by holding Bobl conditional bull widener and hedge against a swap spread narrowing in a sell off via Bund bear narrower.