I’ve wanted to look at non-USD STIR futures for some time now, but it never looked like another central bank was going to active enough. We may be on the brink of a series of moves from a central bank other than the Fed, which would give us a curve that could have a tradeable shape. For now, I want to add the STIR futures from the time zones closest to me – Canadian BA futures, Euribor futures and Short Sterling futures.
The primary focus of the CA newsletter will be the US markets, but we should look for attractive low-hanging fruit on other curves. Practically speaking, I’m going to be asleep when the European data comes out, so the trades may lean towards more longer-term macro views. However, even in the US, we generally take profit before key dates, so this may not be as big a requirement for trades. I want to start slowly, with the goal of adding a few high-probability looks from each currency every year.
For today, I just wanted to do a very basic assessment where the various markets are in terms of their relative hiking cycles. To do this, I took a look at where the various year spreads and 6mo flies were for each STIR market:
- In looking at the year spreads, the amount of hikes priced into the various curves are roughly what you would expect. US >> Canada > UK > EU. ER and L both have increasing year spreads the further out the curve you go, as you would expect when there is not much near-term visibility on a hike. BAs are interesting in that while over one hike is priced in, hikes are more priced in for 6+ months from now (as per the H7 6mo fly being -6.5). In all three non-USD markets, we see the flies in the fronts being non-positive. The US shows more nearer-term hikes than later hikes (as we are in the middle of a hiking cycle) and as a result the flies have all turned positive. We get a nice snapshot of the curve progressions in various phases of the hiking cycle over these markets.
- In the US, the two areas that stand out from the table are the relatively high 2017 hikes and the jagged 6mo fly curve (highlighted in yellow). We had/have highlighted some of these areas as potential sources of value in recent weeks (see Flip and Official Trade tables).
- The ECB has been one of my Six Pillars of US long rates. They are the furthest of the 4 areas from recovering, and the ECB had recently extended QE through 2017. I could see scenarios where they could recover, and where they may need more easing. But in either case, I would expect the front flies to be negative. We see this in the “slow recovery” scenarios on the L and BA curves. A 2017 ECB hike is highly unlikely, but a 2018 hike is still possible. The ECB has limited bullets on an ease, so easing should be limited to 2017. This is the theme of Trade F39 that I sent out last week.
- My UK crystal ball is murky with Article 50 coming up. My outsider impression is that a hard Brexit could crush the UK banking sector. If my wife wants to leave me, I’m certainly not letting her handle more money than she needs to. You could have a double-whammy if banking jobs move abroad and the lofty real estate in the UK (partially fueled from finance) takes a hit. I don’t have any competitive advantage over the markets in trying to guess the Brexit details, so I will be patient unless a structure gets extreme.
- I currently don’t have a strong view of Canada. But I would like to start looking more at US-Canada relationships, since the two economies are closely linked. We also have less timing risk on daily mark-to-markets for cross-market trades.
This is just a preliminary look at the four markets. In future months, I want to expand my analysis and start looking at some cross-market trades – especially spread vs spread and possibly fly vs fly trades. The markets are becoming increasingly correlated, so there may be some tail plays abroad that may offer better risk/reward than in the US. We may even be able to get on a better risk/reward “US” play in a foreign market. I’m excited about these additional prospects for 2017.
 Going forward, I may from time to time just make an estimate as to what Canadian BA13 would be if there was one (BAs only go out to 12 quarterly contracts), just for comparison purposes.