HALISTER1: EUR Rates Payer Vols Likely Weighed by QE, Low Supply: Analysis

EUR Rates Payer Vols Likely Weighed by QE, Low Supply: Analysis

(Bloomberg) -- The recent selloff in rates markets was preceded by a richening of euro OTM payer swaption volatility in relation to receiver vols. But with continued bund buying under QE and net EGB supply remaining negative, pressure may build for that trend to reverse into 4Q, Bloomberg strategist Tanvir Sandhu writes.
  • See chart here for spread between EUR 3m10y 50bp OTM receiver vol and 3m10y 50bp OTM payer vol, and 3m10Y forward swap rate
    • Spread at now -22bp/annual; hit -37bp/annual prior to the bund VaR shock in April 2015
  • Also, ATM 3m10y implied volatility may not gain much traction with delivereds continuing to stay low and long- gamma positions suffering negative carry
  • Interest in fading long-end OTM receiver vols vs payer counterparts rose into the recent correction in rates amid headwinds in Sept.; see analysis here
  • 10Y bucket should continue to benefit from Bundesbank buying with any tweaks to QE parameters unlikely before Dec. and net EGB supply negative in 4Q
    • High uncertainty remains around BOJ’s policy review next week with the JGB curve steepening over the past week pricing potential “reverse Operation Twist”
  • NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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UUID: 7947283

HALISTER1: RESEARCH ROUNDUP: BOJ, Fed Stopping Bond Rout Key for Currencies

RESEARCH ROUNDUP: BOJ, Fed Stopping Bond Rout Key for Currencies

(Bloomberg) -- Rising bond yields and steepening JPY, EUR and USD rate curves have weighed on stock markets, and analysts and investors are split on whether the move will continue, casting doubt over the next direction for currencies.
  • The dollar should get a boost if BOJ were to cut rates, Goldman says; BofAML doesn’t believe the bank will be sufficiently credible to push down real rates and is bearish on USD/JPY
  • GOLDMAN SACHS (Silvia Ardagna, Robin Brooks, and Michael Cahill)
  • The correlation between USD/JPY and the shape of the USD and JPY rate curves is now reverting after a divergence following the introduction of negative rates in January
  • All else equal, a BOJ rate cut should be associated with a weaker yen and support Goldman’s view that USD/JPY has room to move higher to 115 by year-end
  • Though not yet a headwind, a risk to this forecast would be a further rise and bear steepening of the JPY curve, given the historical association between higher 10Y JPY and a lower USD/JPY
  • BOFAML (Adarsh Sinha)
  • USD/JPY direction will depend on whether BOJ announcement is viewed as sufficiently credible to push down real rates; suspect it wont be, hence BofAML’s bearish view on the pair
  • Higher U.S. real rates likely to add to downward pressure on Asian currencies; the pace and magnitude of the adjustment will depend on whether the sell-off in G3 rates morphs into a more sustained “tantrum” associated with lower breakevens
  • NOTE: BOJ making QQE more flexible may lead to steeper yield curve, stronger yen, BOFAML says
  • CREDIT AGRICOLE (Valentin Marinov)
  • USD/JPY likely to remain caught between re-emerging policy divergence and escalating risk aversion
  • USD to regain yield support; should continue as Fed expectations adjust toward resumption of a tightening cycle
  • BOJ to announce policies to re-steepen JGB curve and even cut depo rates further; may not allay fears the central bank is quickly running out of easing options
  • With BOJ fast running out of policy ammunition, investor sentiment and FOMC may weaken JPY
  • UBS (Daniel Waldman and Themos Fiotakis)
  • Skeptical dollar can go higher; don’t expect back-end rates in the U.S. to continue rising amid low inflation, low trend growth and accommodative monetary policy globally
  • Euro-area yields have looked significantly low for awhile; move could extend as yields converge toward fair value
  • Depending on the BOJ meeting, a steeper curve and higher real rates in Japan are possible; such a move limited to a further 30bp rise
  • More sustainable rise in German yields should provide some support for EUR over time and limit USD’s ability to resume a broad uptrend; JPY likely to remain under appreciation pressure until more dovish BOJ signals
  • UNICREDIT (Vasileios Gkionakis)
  • Some normalization in coming weeks remains the central scenario and a re-run of April 2015 moves is unlikely
  • Hence expect a broad-based USD decline and JPY gains; AUD, NZD and RUB to recover recent losses, NOK and CAD to appreciate and EUR/USD to trading close to current range with some upside bias; stay strongly bearish GBP
  • Risk-correlated currencies AUD, NZD would weaken if equity and bond sell-off extends; AUD/USD likely to approach 0.72 and NZD/USD may drop toward 0.68 -- levels at which would consider re-entering longs
  • EM currency selling would likely extend, with ZAR potentially the main casualty
  • Would eventually spur sharper JPY gains as any additional BOJ stimulus will disappoint yen bears; fiscal expansion should also be considered a net positive for JPY
  • BNP PARIBAS (Daniel Katzive)
  • BNP rates analysts see scope for EUR and USD curves to continue steepening near term even as negative net supply in October will limit EGB yield upside
  • U.S. curve probably has more scope to steepen, particularly if inflation expectations begin to pick up
  • Analysts neutral Japan curve now as it has probably re- steepened enough to suit the BOJ’s objectives
  • A modestly steeper U.S. curve would likely coincide with a firmer USD, EUR and JPY against higher-beta currencies; remain positioned for this via AUD/USD put spreads
  • SOCIETE GENERALE (Kit Juckes)
  • A proper bear market needs a pretty radical change in the G-3 inflation and growth backdrop, rather than weariness of markets
  • If the bond correction is a stop-start affair, FX markets will still be choppy
  • SocGen is short NZD/USD and GBP/USD, long EUR/GBP; watching the possibility of a break higher in USD/CAD and remains long AUD/NZD
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
UCG IM (UniCredit SpA)

People
Adarsh Sinha (Merrill Lynch Asia Pacific Ltd)
Daniel Katzive (Bnp Paribas)
Daniel Waldman (UBS Asset Management Japan Ltd)
Kit Juckes (Societe Generale SA)
Michael Cahill (Goldman Sachs Group Inc/The)

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UUID: 7947283

HALISTER1: 2016 Provincial Government Fact Sheet

2016 Provincial Government Fact Sheet

Alert: HALISTER1
Source: DBR (Dominion Bond Rating Service)

Tickers
80491Z CN (Province of Ontario Canada)
2026Z CN (Province of Alberta Canada)
3776Z CN (Province of British Columbia Canada)
80682Z CN (Province of Manitoba Canada)
69033Z CN (Province of New Brunswick Canada)

People
Brenda Lum (DBRS Ltd)
Travis Shaw (DBRS Ltd)

Topics
Fixed Income Research
Prov., Reg. Credit Research
Credit Analysis Research
Credit Research
Investment Research

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UUID: 7947283

HALISTER1: Current 2Y UST Has Further ‘Room to Fall’ in Repo, SMR Says

Current 2Y UST Has Further ‘Room to Fall’ in Repo, SMR Says

(Bloomberg) -- While the current 2Y is trading in “special territory” at -0.10bp, it has “room to fall even further,” since details of the Sept. 2Y auction haven’t been announced yet, Stone & McCarthy strategist Alan Chernoff said in note.
  • Current 10Y “still trading tight,” around 10bp, according to ICAP data
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Alan Chernoff (Stone & McCarthy Research)

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UUID: 7947283

HALISTER1: U.S. ECO PREVIEW: CPI Due in 5 Minutes

U.S. ECO PREVIEW: CPI Due in 5 Minutes

(Bloomberg) -- Aug. consumer price index seen rising 0.1% m/m after showing no change in July (forecast range 0% to +0.2%); index tracks prices in “market basket” of goods, services.
  • Core CPI, which excludes cost of food and energy, seen rising 0.2% m/m after increasing 0.1% prior month (forecast range +0.1% to +0.3%)
    • For year to date, CPI averaging +0.1%/mo; core +0.2%
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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UUID: 7947283

HALISTER1: Brazilian Real Advances; Temer Spending Veto

Brazilian Real Advances; Temer Spending Veto

(Bloomberg) -- BRL gains; U.S. rates and local budget fix in focus.
  • BRL rises 0.2% at 3.2959 per dollar; DI Jan 21 rate -3bps
  • Temer vetoes wage increase for public defenders to avoid spending rise; yday, lawmakers pledged support for reforms
  • IPC-S weekly inflation 0.27% m/m; est. 0.28%
  • BCB auctions up to 5,000 reverse FX Swaps, 9:30am-9:40am local time
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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UUID: 7947283