Divyang Shah, Senior IFR Strategist
This is the theme from ECB’s Coeure who cites that growth will remain weak in 2013 and inflation below 2%.
We would certainly agree with this message and the capitulation of positions over the last few sessions has led the market to price in a higher rate path which we had been a little too early (in hindsight) to work against.
We would look to play against the early pricing and have suggested a Jun05 Euribor call spread with 99.375-99.500 strikes.
The market seems to be listening also with the 12x24 EONIA now down sharply 8bps after taking us out of our pay receive yesterday.
Cognisant of the volatility we would look to enter a 50% short at current 45bp and receive 12x24 EONIA with a stop at a wider 60bp.
The ECB meeting next week will likely help to foster a flatter EONIA curve as well as upside on euribor.
