FxWirePro: What’s cooking in Super Thursday? EUR gamma spreads and FVAs lure ahead of ECB

Today’s ECB meeting will almost certainly see the Council revise up its assessment of the growth outlook to “broadly balanced” in the light of recent favorable economic data. 

There is agreement on the market: the end of the ultra-expansionary monetary policy in the eurozone is imminent. The majority of analysts expect that the ECB will announce a gradual tapering of its asset purchasing programme in September. That, in turn, has important implications for today’s ECB meeting. Many market participants assume that the central bankers will start paving the way to this step now by adjusting the so-called forward guidance.

Yesterday’s rumour that the ECB intends to downgrade its inflation forecasts only briefly depressed the euro, as it ended up against the US dollar. To be precise market participants will focus attention on the following sentence in the ECB’s press statement: The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

We expect a hawkish tone from the ECB at the meeting in June after it was perceived as slightly dovish at the latest meeting.

We are running EURUSD 1M1M FVA longs and EURUSD –EURSEK gamma spreads heading into the event to partake in any Euro gyrations and as a defensive long USD correlation ploy that should guard against a left-field risk shock.

On the whole, poor risk-reward in chasing vols lower from here keeps us defensive on trade recommendations, with longs chosen selectively and with close attention to decay control.

A lot of speculation among market participants has been on whether the ECB will change its forward guidance and remove the 'or lower levels' phrase from its guidance on policy rates. However, in our view, sticking to this guidance and instead delivering another hawkish twist to the introductory statement is most likely. We expect the ECB to argue that the options provided for further accommodation are less likely to be used.

For active delta-hedgers, EURUSD gamma looks worth owning standalone heading into a crucial ECB meeting next week with the cash market decently long on IMMs and spot premium to short-term fair value models not significant; any hint of disappointment or stubborn dovishness from Draghi and co. therefore carries the risk of a painful washout that will reward gamma longs, particularly given the low bar of multi-year lows on 1M ATMs at 6.9 that carry virtually no cushion over trailing realized vols.