US TSYS: Early SOFR/Treasury Option Roundup

Scotia write that recent Canadian political developments have increased the risk that USDCAD gets to 1.45“a lot sooner” than their post-election call for 1.45 in 2H25 before staying there to year-end. 

• “Our fair value model shows USDCAD trading one standard deviation above estimated equilibrium (1.4165) today. Spot’s estimated fair value has been creeping higher since late November.”
• “If the political scene goes quiet over the holidays, the CAD may be able to steady. There is a late year kink is USDCAD’s seasonal profile that typically sees a small CAD rally into year-end. But markets are likely to come back with a vengeance in the new year.”
• “January is the best calendar month of the year for the USD against the CAD (average monthly return of +0.5% over the past 25 years). USD strength tends to persist deeper into Q1 before the CAD—usually—recovers in Q2/Q3.”
• “Mounting political risk in Canada suggest the USD is liable to start 2025 with a bit of a bang. A push to 1.45 (and potential overshoot) risks coming a lot earlier next year than we had imagined.”

Policymakers have been out in force following the ECB’s December meeting, where the bank cut rates by 25bps and dropped its pledge to keep policy “sufficiently restrictive” until inflation reached 2%. 

• Although the changes to the policy statement and the December projections signalled the ECB’s intent to ease policy further, the market reaction was relatively hawkish.
• This seemingly reflected the lack of appetite for a 50bp cut amongst the Governing Council in December, and communique from President Lagarde that suggested a “gradual”, 25bp cutting pace remains appropriate.
• As the new year approaches, the key question for markets is how low the ECB can go, and how quickly will it get there.
• In the following publication, we provide a summary of ECB-speak from December 13 to December 18: 241218 - Weekly ECB Speak Wrap.pdf

• In the FI space, the current bearish cycle in Bund futures remains in play and the contract continues to trade closer to its recent lows. Sights are on 133.98, 61.8% retracement of the Nov 6 - Dec 2 bull cycle. Clearance of this level would strengthen the current downleg. For bulls, a reversal higher would highlight the end of the correction. First key resistance to watch is 136.01, the Dec 12 high. A move above this level would expose 137.18, the Dec 2 high.
• A strong bearish theme in Gilt futures remains in play and this week’s extension reinforces current conditions. The move down has resulted in a breach of key short-term support at 93.40, the Nov 18 low. The break of this level highlights a stronger reversal. Sights are on 72.63, 3.382 projection of the Dec 3 - 4 - 5 minor price swing. Initial resistance is at 93.64, the Dec 16 high and a gap low on the daily chart.