STIR: Repo Reference Rates

• GBP400.0mln had been on offer.
• This leaves GBP5.352bln of the linker in issue.

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• While Eurozone headline HICP met expectations in March’s flash estimate, at 2.2% Y/Y, the more dovish cohort of the ECB is likely to be encouraged by the continued moderation in the year-over-year services inflation rate seen this time; its slowdown to 3.4% marks its joint slowest pace since January 2022.
• However, data including the seasonal-adjusted measures from the ECB indicate that the current pace in the category remains elevated. That could underpin the governing council’s level of weariness level after a potential April cut, which markets view as the base case for the ECB for now.
• The market reaction to the flash inflation round was mixed across key countries, with notable deviations from consensus in different countries. France surprised with a negative 0.2pp deviation (as it did last time), recording a 0.9% Y/Y headline rate, and was followed by Spain coming in at 2.5% with a -0.3pp deviation. Germany also surprised consensus to the downside, by 0.1pp at 2.3% Y/Y, but both the Netherlands and Italy came in firmer than expected (+0.1pp at 3.4% and +0.3pp at 2.1pp, respectively).

• Currency options markets have identified CAD, EUR, MXN, PLN and HUF as being the most exposed to tariff risk headed into Trump's Rose Garden appearance later today. Trump is scheduled to begin his tariff announcement from 1600ET/2100BST - but it remains unclear how the details will be released, reinforcing the likelihood of intraday vol through the US cash equity close.
• We anticipate Trump will opt for a broad country-by-country approach, targeting those that maintain the largest goods trade surpluses with the US. While blanket tariffs or a tiered system remain viable options, this would leave countries including, but not limited to, the EU, China, Mexico, Canada, Japan and South Korea particularly sensitive.
• As a result, CAD overnight implied vols are posting the largest risk premium across G10, pushing implied to 18 points for the third time this year, rivalling the pre-Fentanyl tariff vol events in February and March. This blows out the break-even on an overnight USD/CAD straddle to ~100pips, well over double the YTD average, implying significant two-way risk into Thursday's NY cut.
• Those looking to play USD/CAD downside as part of a tariff-relief play eye breaking even on an ATM 3m USD/CAD put with spot below approx. 1.4075 at expiry (or 1.4125 should an up-and-out barrier be added at the February highs).