By announcing an easing package containing a negative deposit rate, targeted LTRO and a halt to the SMP sterilisation, the ECB managed to surprise the markets.
The easing package has enforced the anchoring of the short end of the EUR curve and is pushing money market to new lows and fuelling lower bond yields in the euro zone.
In Denmark, the Nationalbanken (DN) did not track the ECB, which was against our expectation. The implicit 'rate hike' lowers the probability of further hikes from DN.
In the US, rates have troughed out for now as data has recently improved. Furthermore, it seems that positioning in the markets is cleaner and less biased for higher rates.
International rates
The ECB is now effectively anchoring the short end of the EUR swap curve for a longer period of time and there should not be much room for higher 5Y swap rates.
However, there is some scope for higher rates in the longer tenors - in particular above 10 years, since the aggressive easing combined with the economic recovery and a trough in inflation should boost long-term growth and inflation expectations.
Furthermore, we believe that US rates have bottomed out and will increase measurably over the next 12 months. This is likely to rub off on EUR rates. Consequently, we forecast that longer tenor rates will increase more than is priced into the forwards.
Scandi rates
In Denmark, policy rates are now above the ECB's policy rates for the first time since late 2011. As relatively rates are now higher, the depreciation pressure on DKK is removed and we expect that DN will stay on hold for the entire forecast horizon.
In Sweden, the Riksbank is expected to deliver a 25bp rate cut at the July meeting, possibly with a signal that another might be coming at a later point. Going forward, we see room for steeper SEK yield curves.
After the significant drop in rates among Norway's trading partners, we see a high probability that Norges Bank will revise its rate path lower, thereby postponing the first rate hike further.
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