TenkoFX - Analytics

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UK Rates: From limbo to clarity, preparing for a summer ease - TDS Sandeep Kanihama

Renuka Fernandez, Senior Rates Strategist at TD Securities, suggests that they are long September 16 Short Sterling contracts at 99.57, target 99.82, stop loss 99.44 on the view that the BoE will cut up to 50bps by year-end.Key Quotes“We initiate now September 16 FRA-OIS wideners as a partial hedge to this position, but would attach a very low probability of a libor blow-out given the announcement of an extension of the longer term repo financing operations by the BoE to now end Sept 16, and the recent shift lower in libor.We have been biased to long duration on Gilts and have an end of year forecast of 0.5% on the 10y. However, the market is now pricing in some amount of QE from the BoE, as such it becomes difficult to go outright long on Gilts at these levels. Instead we would rather trade the relative spread to 10y UST and would look to add a tightener when that spread gets closer to 70bps, currently at 58bps.We rec 2y GBPUSD basis on the view that the trade will benefit from any stress in the run up to BoE easing, and should also widen (more negative) on a QE announcement. We see little scope of that spread tightening (less negative) from here given that the spread is currently only back at the lows it reached in the run-up to the vote, and has priced in nothing further given the following Leave outcome. Whilst the spread may not move at all, it benefits from carrying positively.”



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