Start Accumulating USD, EUR Inflation Protection: UniCredit
(Bloomberg) -- Don’t expect another strong move lower in USD and EUR zero-coupon inflation swaps as they have decoupled from any reasonable combination of medium-term inflation forecasts, inflation mandates and realized inflation, UniCredit strategist Michael Rottmann writes in client note.
- Start accumulating a starting position in 5Y5Y USD and 5Y5Y EUR ZC inflation swaps at around these levels
- In cash, ultra-long breakeven inflation in Italy and Germany attractive
- Expect 5Y5Y EUR ZC inflation swap to at least show a modest rebound with oil-price volatility settling down and risk aversion abating
- Expect euro-area core inflation in 1Q 2017 at 1.1% with headline inflation at 1.3%
- Forecast U.S. core inflation in 1Q 2017 at 2.3% with headline inflation at 2.2%
- Spiking oil-price volatility has fueled a massive undershooting of ZC inflation swaps but will likely abate soon
- While not solely linked to collapsing oil prices, heightened financial stress has added to pressure on ZC inflation swaps but will likely peak during the next few mos.
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Michael Rottmann (UniCredit SpA)
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