The ECB specifies the details of its corporate purchase programme

At its April Meeting, the ECB did not announce any new stimulus or new guidance on its policy outlook. It only provided technical information on its corporate purchase programme, which will start in June:

• Conducted through the primary  & secondary markets (totalling between € 5 and € 10 bn. a month)
• With maturities of 6 months to 31 years
• Targeting IG euro-denominated bonds issued by non-bank corporations established in the euro zone

Furthermore, the ECB maintained its forward guidance. Rates are expected to remain at present levels or lower for an extended period of time and well past the horizon of the asset purchases.

Still positive on peripheral debt

The peripheral markets find themselves strongly supported by the accommodative monetary policy stance of the ECB, economic developments (strong consumer confidence figures, lower funding rates for non-financial corporates) and, moderately, by flow dynamics.

Again, carry remains a supportive factor. We nevertheless took partial profit on our overweight on Italy (0.2 in CTMD) & Spain (0.1 in CTMD) with the approach of political events (UK referendum, elections in Spain) that could engender volatility and pressure non-core yields.

Compared with early 2016, concerns about the external environment and the health of the European banking sector have eased somewhat, although uncertainties related to European politics remain, in our view, a key source of risk for the euro zone. We are also maintaining a neutral stance on Ireland and Portugal.

Short duration stance on EMU core rates

The environment has been supportive for core sovereign rates in the euro zone. But now the yield curves, notably in the core area, are in expensive territory. Further, we consider that the disappointing macro news in the US are behind us. Thus the potential for an interest-rate increase by the FED is now much more elevated: we  have a short directional bias on the EMU and US curves both via an optional & a futures strategy.

In the euro zone, we expect the recovery to continue thanks to the ECB’s easy monetary policy, low oil & commodity prices and improving labour markets supporting household consumption. In March & April, the manufacturing PMI (stable to 53) & the German IFO index recovered somewhat from their lows, reflecting a stabilization of the situation in China and the Emerging Markets. Strong Q1 GDP triggered an upgrade in the 2016 GDP forecast, from 1.4% to 1.6% yoy.

Good momentum in EU & US linkers markets

In our view, despite the strong performance seen since February, inflation expectations do not yet reflect the improving inflation and economic conditions, certainly in the US. At the same time, break-even inflation protection is supportive and both the FED and ECB are keeping a dovish bias. Euro-inflation is likely to remain negative or around zero until July, before rising  progressively towards year-end. Going forward, base effects related to oil prices will be supportive. Valuation-wise, a limited inflation risk premium is priced in both in the USD and the EUR. We are keeping a positive bias both on US (0.25 in CTMD) and Euro linkers (0.21 in RCTMD).

CURRENCY STRATEGY

Pacific currencies still moving in a dispersed order

According to our in-house indicators, the JPY still offers attractive appreciation opportunities. This is due to cheap purchasing power parity, good investor positioning and capital flows. Even if investors are still short the currency, the trend is reversing and could engender a further potential important rebound. However, Japan’s activity cycle is reaching a peak while disinflation is well anchored.

The softness of the business cycle in China continues to pressure currencies of major partners such as New Zealand. The fall in commodity prices is also weakening the NZD. Nevertheless, the divergence between NZ expansion and disinflation could lead the Reserve Bank of New Zealand to ease its monetary policy.

According to our calculation of the Taylor rule, the NZ & AU central bank rates are too high. As a result, the NZD and AUD seem to be again overvalued. We are keeping a short position on the kiwi, as long-term drivers still point to overvaluation. However, the activity cycle may offer some opportunities in long AUD vs NZD.

Cautious on G4 & G10 currencies

In the UK, the Bank of England will remain very cautious in the coming weeks as the referendum in the UK approaches. If a “Brexit” does materialize, gilts could sell off dramatically, as the sharp drop in the GBP would have a significant reflationary impact. “Brexit Risk” could be hedged with UK linkers but, from our point of view, we prefer not to be exposed to the GBP.

The Canadian Dollar (CAD) is also well-oriented, even if its purchasing power parity points to a fair valuation. In fact, oil remains the main driver in the current environment and must be monitored. We are keeping a neutral stance on the CAD.

We are still positive on the EUR, which is slightly undervalued in terms of its purchasing power parity. The EUR is still positive compared with all currencies except the JPY. However, we remain very cautious, waiting for the outcomes of the next political issues (elections in Spain, UK Brexit, developments in Greece).

Norway is staging a comeback, combining economic recovery and reflation. This improving environment is supportive to the NOK and could be a great performer if oil manages to stabilize.

Still aggressive on Emerging Markets Forex

Policy divergence within the developed markets is no longer supportive of the USD. The strong USDlar trend has reversed YTD as EM risks have declined. Most emerging markets currencies still appear cheap on the long-term valuation metrics but a further recovery will condition EM growth and commodity recovery in 2016. Softer Chinese data associated with credit woes and stronger – although mixed – US data (pre-the June Fed meeting) point to higher risk premiums in EMFX.

We are positive on currencies of oil exporters – the RUB, the COP, the MYR – on the view that oil stabilization is likely around current levels. Our overweight on the RUB is backed by high real rates and a positive current account.

We also like many Eastern European currencies such as the HUF, the PLN and the RON, given the good mix of growth inflation.

On the other hand, we remain cautious on the TRY. Turkey remains one of the most vulnerable EM countries and one of the most dependent on short-term portfolio flows to fund its large current account deficit (4.5% of GDP). Likewise, Turkey has experienced a significant increase in private sector debt (20% of GDP) since 2010, which has been partially offset by the low level of household debt.

We are negative on the CNY (depreciation due to a more market-oriented exchange rate) and the THB (deteriorationg fundamentals and accommodative monetary policy).