EQUITIES: EU Bank Vol trade

Nordea recommend receiving 1y1y/2y1y €STR.

• They note that current pricing shows “Dec ’25 ECB implied rates at low levels that require a good deal of negative news to materialise, while the 2y1y is at quite high levels, showing modest lasting economic damage”.
• Nordea believe that “both views make sense. On the one hand, it is not hard to see scenarios where a lot of rate cuts will be needed. On the other hand, we can also subscribe to the view that damage to the Euro-area economy is likely to be modest even with the tariff increases (owing to fiscal support)”.
• However, they flag that the “curve is now stretched to the point where the roll-down will compensate for quite a lot of the curve risk. Some additional rate cuts for this year will steepen the curve and be negative for the trade. However, the curve could flatten with fewer rate cuts than currently priced and could flatten in the really bad scenarios with many rate cuts where the ECB also ends QT and outright receivers emerge further out on the curve”.

• A lower leg for the Dollar, selling interest are emerging against the EUR, CAD, CZK, SEK, Cable is also back towards the intraday high.
• Risk On tone, but also the US Tnotes now testing session high could be helping here, so worth keeping an eye on the USDJPY and the previous printed intraday low of 141.49.
• The US 10yr Yield is looking to break below this Week's printed low of 4.3287%, but next resistance in TYM5 is seen much further out, up to 111.17+.

• Risk appetite continued to firm in the equity space overnight as US President Trump stated he has no intention of firing Fed Chair Powell. While helping the Euro to extend its most recent pullback, the more optimistic backdrop has conversely benefitted the Australian dollar. With this in mind, EURAUD is currently down 0.75% on Wednesday, having notably tested the 20-day EMA in early European trade.
• While the 20-day has been tested a few times throughout EURAUD’s impressive 13.44% rally from the February lows, the cross has not closed below this average since Feb 24. For this reason, a close below 1.7738 would be a significant development. An additional breach of two daily lows at 1.7716 and 1.7699 would signal scope for a deeper selloff towards 1.7419, the March 11 high.
• Both the French and German flash April services PMIs were weaker than expected, which will be helping the Euro to consolidate its step lower overnight. For Germany, this was the first contractionary reading since November 2023, and the lowest since February 2024.
• In Australia, Q1 CPI data is released on April 30 and will be an important input into the May 20 RBA decision, where a rate cut is largely expected. There are high correlations between NZ and Australian CPI data – more on this here: https://mni.marketnews.com/3YJBUxz