EUR: Peace breather and ECB expectations support – Commerzbank

Commerzbank notes that the Dollar is selling off as risk sentiment improves, with the Euro rising close to 1.17 against the Dollar following the ceasefire news. The bank highlights that an extended ceasefire would make an April ECB rate hike unlikely and sees the €STR curve’s previously aggressive pricing as a backdrop for bullish steepening in Euro rates.

Dollar weakness lifts single currency

“Brent slides to $95, US Treasuries bull-steepen with 10y yields falling 6bp. Asian equities and e-minis rally with Stoxx future up some 5%. Dollar sells off with EUR rising close to $1.17.”

“If the ceasefire gets extended, an ECB rate hike in April, and beyond, becomes unlikely. The €STR curve was pricing some 80bp of rate hikes yesterday, about the most since the war began, which should give rise to strong bullish steepening.”

“Just before the Easter break, the ECB published a blog post with insights from their Bank Treasurer Survey on preferred reserve levels and their proprietary Securities Financing Transactions Data.”

“While transparency remains patchy, the findings support our view that reserve scarcity is still a long way off. The ECB projects that, by the end of this year, banks accounting for 50% of total assets will reach their preferred reserve level, up from 26% ‘now’ (which we understand to refer to last October). Unfortunately, the ECB does not disclose the aggregate preferred reserve level, akin to the Preferred Minimum Range of Reserves (PMRR) revealed by the BoE.”

“While this is probably towards the lower (or later) end of the scale, we feel affirmed in our view that the point at which reserve scarcity will cause upward pressure on rates and lead to banks returning to ECB operations on a larger scale is unlikely to be reached before next year.”

“While repo markets remain calm for now, by the end of the year we believe this will become another argument for cheaper Schatz swap spreads.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)