FX for surfing, FI for diving

- FI Strategizer: Stable policy rates and slowing growth momentum should prove beneficial for long-term yields, especially AAAs. The belly of the curve performed well in 3Q, but the 2/5-year spread still offers value for yield hunters. Spreads within the eurozone should stay volatile in 4Q.
- EU Portfolio Strategy: Over the next several quarters, we face a global fiscal policy tightening (reversed German reunification) which calls for a modest long duration, adding to the active deviation if 10Y Bunds rise by another 25bp. Country wise, we continue to favor BTPs within periphery. We also take a prudent stance on France.
- Money Market: Demand for liquidity at the ECB refinancing operations has stabilized in recent months, although at regional level we still observe high reliance on ECB funding. Full allotment should stay in place until 2Q11, contributing to smoothing the path of MM rates in EMU.
- Inflation: As we had pointed out last quarter, EMU BE proved a good opportunity in 3Q. Now we are back to more “average” and unattractive levels. In 4Q we expect inflation to remain subdued, recent ECB remarks on upside risks are the only factor that may provide further support.
- Supply Corner: 4Q will be the least liquid quarter of the year, with just EUR 82bn in redemptions and EUR 30bn in coupons. We expect gross supply in 4Q to be EUR 165-180bn, with risks skewed to the downside. Net supply should be EUR 80-95bn, up from EUR 25bn in 3Q.
- FX Strategizer: Global uncertainty is still on and investors will continue to frequently change their mind due to opposing and temporary short-term drivers. The FX market remains more interesting for big-wave surfers than for free-climbers.
- EUR: EUR-USD will reflect again global and local risk factors (US growth fears vs. EMU woes), staying mostly trendless throughout 2H11. More strength will occur in late 2011, when the ECB starts hiking rates.
- JPY: BoJ intervention managed to stem JPY appreciation, but USD-JPY reversal is unlikely to exceed 90-95 in the medium term. In turn, EUR-JPY should progressively pull back above 125 by the end of 2011.
- CHF: SNB sounded more dovish on growth and inflation, but this will not prevent EUR-CHF to slide again below 1.30 if risk aversion persists. The 2011 outlook still points to a consolidation back towards 1.35.
- GBP: Cable may suffer again and a rally above 1.60 can be penciled in only in late 2H11, when we now expect the BoE to start a rate hike cycle. EUR-GBP should again remain mostly stuck within the 0.80-0.85 band.
- Commodity Currencies: The recent rally of the three dollars should be reverted if risk aversion escalates. More AUD, NZD and CAD strength should occur in 2011 in case of a relaxation of the global picture.
- Nordics: More EUR-SEK and EUR-NOK weakness is in the pipeline, but more attacks & retreats can be expected along their appreciation path.
- FX Special: Risk aversion has clearly enhanced the role of safe-haven currencies, but our dedicated special demonstrates that the yen tends to outperform the CHF and the greenback in this role.

Unicredit Curves & Crosses 2010Q4

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