Recalibrating to the ECB – TDS

By FXStreet FXStreet (Guatemala) – Analysts at TD Securities explained that whilst the measures taken by the ECB in December disappointed markets, they will ensure a high level of excess liquidity remains in the system for an extended period.

“The 6M extension to the program will take the APP to €1.5tr. This extension and the reinvestment of principal payments on maturing securities is expected to inject an additional €680bn of liquidity by 2019. We expect excess liquidity to be around €1.3tn by March 2017.”

“In addition, the extension to the 3mo LTROs to beyond the expected end date of the APP should be taken as a form of forward guidance to interest rates and further easing for an extended period. We continue to favour EUR2s10s bund steepening as a trend as the front end should be anchored on forward guidance while the long end can drift higher on higher inflation and growth expectations.”

“We close out our 5y EUR/USD cross currency basis swap trade. We first recommended it in September and reiterated it in November, expecting a move lower to –60-65bp on an aggressive ECB package. As the latter failed to materialise, we see no further impetus which will push the basis much lower, …read more

Source:: FX Street