Market Economics | Interest Rate Strategy - BNP PARIBAS ...

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Trade Reviews Options, Money Market and Bond Trades – Tactical & Strategic Trades This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks) allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend. For each trade we provide the expected target and the recommended stop loss. Current* Targets Stop Entry Closed Strategies USD Steepener Pay USD 3M-fwd 2s10s Trade closed (4/5). PnL EUR -127k. Euribor Spread Buy ERU0Z0 Trade closed (4/5). PnL: EUR -72k. Existing Strategies Yield Curves EUR Flattener Receive EUR 1M-fwd 2s10s Asymmetric near-term response to "gradual" phasing out of unconventional policy/liquidity measures. GBP steepener Pay GBP 1Y-fwd 2s10s A dovish BoE and a toxic sovereign debt/deficit combination should keep the spot swap curve at steep levels in the medium term. Money Markets Euribor Basis Buy ERM0 Basis OIS/Bor spreads are at very interesting entry levels compared to the evolution of CDS and other risk indicators. Moreover, ECB liquidity volatility should be supportive of this strategy. 180.8 (T) 163.0 (S) 37.0 (S) 270.0 228.0 242.25 (22-Apr) 35.0 10.0 20.0 (31-Mar) 170.0 190.0 184.8 (04-Mar) 200.0 139.0 147.0 (12-Feb) 40.0 20.0 24.0 (29-Jan) Options Euribor Fly Buy ERU0 9862/75/87 P 1.0 12.5 0.0 1.5 Cheap downside strategy, playing the normalisation of Eonia. The position complements with the upside fly (no-normalisation strategy). (S) (13-Jan) Euribor Fly Buy ERU0 9912/25/37 C 4.0 12.5 0.0 1.5 Upside protection in case of liquidity spillover post June. Rolldown trade. (S) (12-Jan) Eurodollar Call Buy EDU0 99.25 C 50.0 0.0 23.5 Trade closed (19/4). PnL: EUR +30k. (08-Jan) Sterling Fly Buy L Z0 9900/25/50 C 7.0 25.0 0.0 3.5 Rolldown strategy for unchanged MPC through 2010. (S) (05-Jan) *Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. Carry / mth Risk** P/L (ccy/Bp) 10k/01 USD - 165k -16.5bp 6.25k/01 EUR -72k -11.5bp -3bp 10k/01 EUR +40k +4bp 5k/01 GBP +80k +16bp 5k/01 EUR +65k +13bp 10k/01 EUR -5k -1c 10k/01 EUR +25k +2.5c 5k/01 USD +40k +8c 5k/01 GBP +18k +4c Interest Rate Strategy 7 May 2010 Market Mover, Non-Objective Research Section 60 www.GlobalMarkets.bnpparibas.com
Judging Currencies by Liquidity • The assessment of global liquidity will remain important for the judgement of currencies. We regard global liquidity growth as at risk and cite financial sector regulation, EMU stability concerns and Asian tightening of monetary conditions as the main factors to watch. • Reduced global liquidity will be an outright bullish USD factor. Should equity markets decline, the EUR will drop hard. • Commodity currencies are extremely bullishly positioned. China absorbing liquidity will undermine commodity prices. China’s CPI release on 10 May will be trend-setting. • Any post-election sterling rally should be sold. Sterling undervaluation talk has no substance taking into account the degree of private and public sector leverage. Risk-off strategy remains valid Currency markets will have to deal with four big themes going forward. Global liquidity, financial sector regulation, EMU stability issues and the pace of monetary tightening in EMKs will affect the performance of risky assets directly and indirectly. At first glance, these themes seem to be independent topics, but they are not. In fact, global liquidity conditions – hence the performance of various asset classes – will be impacted by the structure of upcoming financial sector regulations, the decline of monetary velocity due to the weakening confidence in-EUR denominated assets and the pace of tightening in emerging markets in general and China in particular. All these factors bode poorly for liquidity conditions, suggesting sticking to the disinvestment strategy that we spelled out three weeks ago. Deficits, deficits, deficits Importantly, the current economic cycle is different in nature from previous cycles witnessed since WWII. This cycle is all to do with balance sheets in conjunction with global imbalances – very different from economic downturns triggered by overinvestment in capacity or inventories. Economic upswings starting from a new equilibrium level between investment and savings can develop into a prolonged period of prosperity but, this time round, aggressive policy measures including quantitative easing and a fiscal expansion never witnessed before during peace time have pushed economies back on to the growth path. However, imbalances have never been adjusted. In fact, the aggregate of 16 14 12 10 8 Chart 1: Total Net Borrowing Needs of the Sovereign Sector (% of GDP) 6 4 2 0 Euro area United States United Kingdom 2003-08 average 2009 2010 (estimate) 2011 (estimate) Source: IMF, BNP Paribas 120 110 100 90 80 70 60 50 Untied States Households Non-financial corporates 40 00 02 04 06 08 10 Source: IMF, BNP Paribas Chart 2: Credit to GDP (%) 120 110 100 90 80 70 60 50 Euro area Non-financial corporates Households 40 00 02 04 06 08 10 120 United Kingdom Non-financial 110 corporates 100 public and private debt in industrialised economies is now higher in absolute and relative-to-GDP terms than in 2007. The conclusion to draw from this observation is straightforward. Industrialised countries do not have the resources for strong, domestically driven growth. Instead, the growth impulse will have to come from outside, requiring a higher level of competitiveness. This can either be achieved by adjusting to higher productivity levels or by allowing currencies to depreciate. Within the group of industrialised nations, the US probably has the most flexible economy, leaving Europe and Japan lagging behind. Chart 3 shows that the current advance of the greenback is underpinned by US productivity gains. When we project USD strength within our G10 currency analysis, we mean a stronger USD in the context of the currencies of other industrialised nations. Indeed, we expect most emerging-market currencies to outperform the USD over the next few years, only interrupted by periods 90 80 70 60 50 Households 40 00 02 04 06 08 10 Hans Redeker 7 May 2010 Market Mover, Non-Objective Research Section 61 www.GlobalMarkets.bnpparibas.com
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Market Economics | Interest Rate St
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UK: all eyes on the election US: re
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Event response The ECB is being ove
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Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11 and 12: Market Stress Charts • Signs of s
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21 and 22: On inflation, the statement was als
Page 23 and 24: quarterly average of 2.7% in the fi
Page 25 and 26: US Credit: Still the Recovery’s B
Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39 and 40: Chart 12: 90-119 Day Dlq for FRE 90
Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59: Germany 10y: Within MT falling wedg
Page 63 and 64: type of regulation would reduce mon
Page 65 and 66: Euro Dives • The euro is collapsi
Page 67 and 68: Currency Spot Trade Recommendations
Page 69 and 70: Economic Calendar: 7 - 14 May (cont
Page 71 and 72: Key Data Preview Chart 1: US Payrol
Page 73 and 74: Key Data Preview Chart 5: UK Manufa
Page 75 and 76: Key Data Preview Chart 9: French GD
Page 77 and 78: Key Data Preview Chart 13: US Indus
Page 79 and 80: Treasury and SAS Issuance Calendar
Page 81 and 82: Central Bank Watch Interest Rate EU
Page 83 and 84: FX Forecasts* USD Bloc Q2 '10 Q3 '1
Page 85: RESEARCH DISCLAIMERS: IMPORTANT DIS
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