Rates Spark: Asymmetric relationship between oil and rates
At a Glance
The desk observes an asymmetrical impact of oil prices on euro interest rates, where declines in oil do not translate to equivalent drops in rates. Per the full note , the current dynamics are reminiscent of prior cycles, particularly noting that euro swap rates have remained elevated despite easing oil prices. This supports a sustained hawkish outlook from the ECB amidst robust eurozone growth indicators. Our consensus view, while acknowledging potential economic headwinds, expects euro rates to remain resilient and elevated over the near term.
Key Takeaways
- 01Euro rates exhibit an asymmetric response to oil price changes, remaining elevated despite oil's recent declines.
- 02Current euro swap rates are approximately 20bps higher than past levels at similar oil price points, indicating limited downside potential.
- 03The ECB's consistent hawkish tone further supports the desk's view of elevated euro rates.
- 04Economic resilience in the eurozone, evidenced by strong PMI readings, suggests that rates will not follow oil downward quickly.
Full Analysis
What the desk is arguing
The desk highlights an asymmetric relationship between oil prices and euro rates, illustrating that euro swap rates do not decrease as rapidly as they rise in response to changing oil prices. Per the full note , this phenomenon has been observed historically, indicating that current rates are likely to stay higher for longer, even as oil has retreated from recent highs.
Supporting this view is the fact that the euro 2Y swap rate is currently about 20 basis points higher than it was previously when oil prices hovered around the $100 mark. With the ECB maintaining a hawkish stance and eurozone PMI indicators remaining robust, the downside potential for euro rates appears limited in the immediate future.
Where it sits in our coverage
Our internal consensus target for euro rates is currently set at 1.075, with a range from 1.04 to 1.12. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s view aligns closely with the targets from jpmorgan, which supports the expectation of sustained higher rates, while contrasting with bofa, which anticipates lower rates.
How other firms see it
Firms such as jpmorgan and credit-suisse are in alignment with the desk's perspective, projecting elevated rates in the near term. Conversely, bofa holds a contrasting view, positing potential declines in rates.
In terms of market relations, the dynamics between euro interest rates and inflation will be pivotal, with a specific focus on the eurozone's inflation metrics influencing rate expectations. The euro/dollar relationship is likely to reflect these underlying rate dynamics closely.
Market Implications
Traders should closely monitor the euro 2Y swap rate, currently at around 1.10, as indicative of prevailing market sentiment regarding future ECB actions. The juxtaposition of robust economic indicators against potential inflation pressures will be critical in shaping trader positioning.
From the original
Articles Rates Spark: Asymmetric relationship between oil and rates Published 17:15 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets are following a similar pattern as before, which means euro rates don't follow oil back down as qui
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