FxWirePro: Rates Hedging Perspectives Amid Geopolitical Risks

With financial markets fully expecting the US Federal Reserve to lower interest rates at its meeting at the end of the month, today’s comments from both Mester (non-voter) and Williams (voter) will be closely watched. In particular, with some Fed members previously citing trade tensions as one of the downside risks for US economic growth, it will be interesting to see if there is any change in tone in light of the positive developments at the G20 meetings.

Bonds rallied again this week amid somewhat softer economic data and headlines suggesting hurdles for reaching an agreement on US-China trade issues remain.

In the Euro area, various surveys have been on the softer side but global factors will likely remain more relevant for yields. Given the event risks over the coming week, stay neutral duration outright. They recommend shorts in 5Y in a 2s/5s/10s butterfly on the German curve as a convex play on either a QE extension or higher yields and 2s/10s conditional bull flatteners via options as a QE hedge. They keep selective intra-EMU spread tightening exposure via 10Y Spain vs. France and hold 5s/10s Italy flattener vs. Germany as a political risk hedge.

In Japan, the BoJ’s mini-minutes made a small step towards further easing, with Board members showing greater concern over downside risk than Kuroda conveyed at the post-meeting press conference. 

In Australia, AUD outperforming as RBA turns neutral following cut, interest rates were cut by 25 bps as expected, reduced from 1.25% to 1.00% and have now shifted their stance to watching the data to see how the economy responds going forward. As a result, we retain a medium-term outlook for lower rates expressed via strategic longs in 6Mx6M AUD OIS swaps. However, with a defensive portfolio overall, they see value in tactical shorts in 3Y AUD futures to hedge near-term event risk. Courtesy: Lloyds & JPM

Currency strength index: FxWirePro's hourly EUR is flashing at -99 (highly bearish), hourly USD spot index was at 110 (highly bullish) while articulating (at 12:46 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex