Market Strategy Update: Repositioning For Higher ECB Rate

Significantly higher global oil prices on the back of widespread political turbulences in the Middle East and North Africa (MENA) region have led to higher volatility in financial markets, and most notably, resulted in a fundamental re-pricing of interest rate expectations in the euro-area since our last asset allocation strategy update. The immediate implications for our eurozone strategy are that we are now forecasting a total of 100bps of policy rate hikes by the ECB in 2011 to 2.00%, reinforcing our bearish bias on core-eurozone government bonds. Crucially, though, with a prospective hike as early as April now looking increasingly likely, we have turned bullish the euro - having previously maintained a neutral stance - as we see the interest rate differential between the eurozone and US widening.

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