COAL: Kaub Water Levels Remain Critical

Decent Gilt auction relative to the re-openings of the previous on-the-run 10-year 4.25% Jul-34 Gilt. The bid-to-cover ratio of 2.92x is broadly in line (if not a bit higher) than seen for re-openings of the Jul-34 line. We had expected a solid bid-to-cover heading into the auction.

• Meanwhile, the yield tail of 0.5bps is tighter than the 0.8-1.3bp range observed for re-openings of the Jul-34 Gilt since September. We had flagged the risk of a wide tail in the region of 0.9bps heading into the auction (particularly given volatility in FI markets recently).
• The lowest accepted price of 98.542 was above the 98.5195 pre-auction mid-price. The Gilt currently trades at 98.5350 at typing.

SocGen write that it is "time for USD/CAD puts" - they recommend positioning for a CAD recovery into the spring, and look to take advantage of 3m options that are still attractively discounted compared to front-end vols.

• They write that as trade fears have intensified the volatility skew in the direction of CAD bearishness, CAD calls are now discounted compared to ATM vol for all OTM strikes and, as such, low strikes of intermediate expiries are currently a sweet spot in the USD/CAD vol surface.
• They point to expressing this view via buying a 15D USD/CAD 3m 1.39 put strike or buying a USD/CAD 3m 1.37 one-touch option.