Sell the single currency versus sterling, advises RBC
The European Central Bank is set to deliver its latest monetary policy decision on Wednesday.
The last time its president, Mario Draghi, held a post-meeting press conference, on April 15, he was “glitter-bombed” by a protester, and the eurozone’s benchmark 10-year borrowing costs were about 12 basis points.
Since then, security doubtless has been beefed up. And so have yields. The benchmark Bund is currently offering 60bp.
There is little in that move higher that can be pinned on Mr Draghi.
Rather, a feeling that the eurozone economy is not as weak as thought, linked to a rush by investors to exit the overcrowded “long” Bund trade is the favoured reason.
This back up in Bund yields has helped lift the euro off its 12-year lows of sub-$1.05, too. What now?
It’s likely Mr Draghi will be asked again at his press conference if he intends to see his €1.1tn QE programme through to the end.
The market doesn’t expect him to deviate from a “yes” to that question, so any suggestion he is considering curtailing QE could give a sharp pop to Bund/peripheral yields and the euro — especially if it dovetailed with some positive news on a Greece deal
But, as I say, a QE shift is unlikely.
Instead, an “as we are” approach may encourage investors to start rebuilding more euro shorts.
RBC Capital Markets says sell the euro versus sterling. “With a full UK rate hike now priced more than a year into the forward curve, there is significant scope for GBP to rally.”