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At the December meeting, the ECB announced a formal end to its asset purchase programme as widely expected, thereby concluding its balance sheet expansion. At the same time, the ECB adjusted its guidance in the reinvestment strategy. The ECB will now reinvest in full at least past the first rate hike, thereby still having an accommodative monetary policy stance well into 2019.
The EONIA curve is pricing the first 15bp hike by October 2020 and the depo rate to be at 0% only by October 2021; keep paying Dec’20 ECB OIS.
With the ongoing softness in macro data and a push back in ECB hiking expectations, focus will likely shift towards carry trades. We prefer expressing this view in the sub 2Y sector on comparable carry characteristics but lower vulnerability to a sell off.
Keep reds/blues EONIA curve steepener as a bearish duration proxy.
Favour greens/golds weighted curve flattener on RV considerations.
Bullish hedges: Hold 2s/10s weighted bull flattener.
Initiate Mar’19 Schatz/Bund weighted bear steepener.
The empirical positive directionality of swap spreads to yield levels made swap spread narrower a better short duration proxy than outright positioning.
Schatz swap spread remains too narrow vs. fundamental drivers. With the ECB dismissing any short term risk of Operation Twist or reduced buying below the deposit rate we have a widening bias at the front end of the curve.
We recommend long in 112.30 Mar’19 Schatz call as a cheap and convex way to hold Schatz OIS swap spread widener.
Bund swap spreads appear too narrow vs. yield levels on a short term regression although broadly fair on medium term valuation model.
We squared-off Mar’19 Bund swap spread narrower at a modest profit and turn neutral while keeping a medium term narrowing bias.
Hedge against further flight-to-quality dynamic via Mar’19 Bund conditional bull swap spread widener.
We have a flattening bias on the Bobl/Buxl OIS swap spread curve.
Bund implieds are broadly fair around current levels. We have a medium term bullish bias on implieds but tactically refrain from outright long gamma positions.
Instead, we recommend buying Mar19 Bund put spread to position for a reversal of the recent rally.
Hold Schatz/Bund vol curve flattener as a long gamma proxy with medium term horizon.
On the back of the softer activity data the discussion on the growth risk assessment was particularly interesting. As expected, the ECB kept the overall assessment of the growth outlook as broadly balanced, while also pointing to risks moving to the downside. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 96 levels (which is bullish), hourly USD spot index was at -126 (bearish) while articulating at (06:28 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
