FED: BofA, Goldman Tweak QT Views On Fed Minutes (1/2)

DSTA has announced it will be looking to sell E2.0-2.5bln of the 2.50% Jan-30 DSL (ISIN: NL0015001DQ7) at its auction next Tuesday, Jan 28.

OI was little changed during yesterday’s rally in gilt futures, indicating little movement in net positioning. That came after ~9.5K of fresh net shorts were seemingly set on Monday. Short-term positioning in the contract still feels net short to us.

• Working off a BoC study from Jul 2019, which shows a 25% sweeping tariff could be worth around 6% of Canadian real GDP, CIBC estimate that the BoC’s overnight rate could fall as low as 0.8% with 2Y yields at 1.65% and USDCAD at 1.5340.
• This is a hypothetical scenario. “Implementation hurdles, negotiation, and the high risk of retaliation in this scenario makes it little feasible that a trade war will get that far”.
• They estimate that USDCAD currently has 2.3% of Trump premium.
• Considering alternate scenarios, complete elimination of tariff risk would see USDCAD “move strictly off our Bank and our Fed call (CIBC Economics BoC: 4x 25bps cuts every meeting until June; Fed: H1 hold, 3x 25bps cuts in H2). In this case, USD/CAD hovers between 1.43-1.44 in H1 on continued headline uncertainty, before falling to 1.3750 in the back half of the year due to more aggressive Fed cuts in H2.”
• Alternatively, they run scenarios with 10% tariffs and 20% tariffs with both energy & auto carve-outs as well as just energy carve-outs. Against these scenarios, they see USDCAD peaking at 1.461 and 1.468 in the 10% case or 1.478 and 1.496 in the 20% case.
• “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”