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Lower USD Rates Becoming Less Attractive

ByDanske Markets
Published 10/24/2013, 05:42 AM
Updated 05/14/2017, 06:45 AM
USD/EUR
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The position to be short the belly of June14/15/16 euro was established on 4 October at -55.5bp (link). We close at -44bp. P/L is +11.5bp.

The rationale behind the trade was to position for a re-steepening of the US money market curve with positive roll-down. However, given the relative richness of the belly at opening, we advocated that it could also perform in a rates down environment if Fed tapering and consequently rate hikes were pushed further out in the future.

Following the resolution/postponement of the debt ceiling, rates have in general declined, as the markets discount a delay in tapering/hikes, and this week’s NFP release only added to that notion. This has led to a significant flattening of the money market curve and the position performed 11.5bp.

We believe the position will now primarily perform with lower rates, unless rates rise sharply and the market again begins to discount a first rate hike as soon as end-2014. Hence, as we believe that risk-reward for being positioned for lower US rates is becoming less attractive, we now close down the fly.

We only have one recommendation open now, which is to receive the 5Y5Y USD/EUR swap spread. We keep this position open for a target of 75bp (currently around 99bp).

To Read the Entire Report Please Click on the pdf File Below.

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