Forex Investment and Currency Trading

In the US, the opening of the discount window to primary dealers (Primary Dealer Credit Facility or PDCF) and the introduction of the Term Securities Lending Facility (TSLF) that accepted private-label mortgage collateral seemed to moderate the flight-to-quality bid over the Easter holiday and the Treasury curve bear flattened. Although the first TSLF auction had a low bid-to-cover of 1.15, the $37bn of loans outstanding from the PDCF indicate that liquidity needs remain, especially entering quarter end.

In addition, once the market makes it past quarter end, it will likely face a second consecutive significant decline in payrolls—currently forecast is a decline of 70k. So even though repo and bill rates below 150bp are likely unsustainable, the Treasury 2s10s curve could steepen, especially as the market begins to price in more easing on economic weakness—the Fed funds rate is forecasted to fall to 1.50% in the second half of the year.

Euribor contracts could feel additional pressure due to the Eurozone CPI released on Monday. However, last week, hawkish comments from ECB’s President Trichet and arch-hawk Weber were not enough to bring market expectation above 3.50% in 2009. As a consequence, traders recommend trading reds Euribor from the long side and see the current level as supportive.

The sharp flattening of both the yield and the swap curve, accentuated in swaps by the extreme inversion of the ASW curve, provides an opportunity to re-enter steepeners. Back in October and January, the ASW curve disinverted - in 2s10s - as the new quarter started. As a consequence, and given that 2s10s are currently below 20bp, the favour is swap curve for the steepening position.