FxWirePro: Hedging perspectives on French politics and activation of article 50

Despite the ruckus in the UK press over the inclusion of Gibraltar in the EU’s draft Brexit guidelines, the tone from both sides during the trigger of Article 50 was surprisingly cordial. The UK admitted that it could not “cherry pick” what it wanted from the EU, and the latter showed some flexibility in allowing talks on the “framework for the future relationship” once progress had been made on the divorce terms. So far so good, but the negotiations are likely to get more contentious and complicated soon.

Fetch profits on M7/U7 Short Sterling steepener boxed vs. EURIBOR flattener.

Receive the belly of level-adjusted 3Mx1Y/1Yx1Y/2Yx1Y GBP swap fly. Keep 1Yx1Y/2Yx1Y SONIA curve steepeners.

Close short 10Y gilt for a loss but keep medium-term bearish bias. Keep 1Yx1Y/15Y swap curve steepener.

Stay short the belly of the 2s/5s/10s gilt fly (50:50). Go tactically long the belly of the 10s/30s/50s gilt fly (50:50). Initiate 5s/10s/30s bear belly cheapeners.

Turn neutral on 5Y swap spreads, keep 30Y swap spread narrower. Take profit in short 1Y gamma. Bullish bias on 10Y gamma.

French election hedge:

We anticipate receding political risk in France in a baseline scenario of Macron Presidency, while the ECB is likely to turn to a neutral stance but still keeping the QE tapering/rate hike sequencing unchanged.

German yield curve is biased steeper while French and peripheral credit curves are expected to flatten.

The growth is great and warrants higher yields, but we believe in the old ECB sequencing (QE tapering first), hence we keep steepening exposure.

Le Pen’s chances are slim but not zero: enter intra-EMU tighteners vs. Germany, but keep cheap hedges: short end OLO and DSL UW, add France and Spain 3s/10s credit curve flatteners, OW low-coupon bonds vs. high-coupon.

ECB’s neutral stance will steepen the money market curve. Receive Jun18 ECB OIS. Keep 2s/5s/10s bear belly cheapener and sell Jun19 in the Jun18/Jun19/Jun20 50:50 EURIBOR fly.