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DB Today -Global/Macro

With the February BoE approaching, pricing at the very front end of the
UK curveis elevated to recent averages. May-18 is close to 45% priced
with a full hikeby November. We see greater value in shorts further out
the front end RecentBoE commentary has suggested little urgency to move
pricing towards a hike atupcoming meetings. In contrast Saunders and
Tenreyro’s comments have pointedtowards a higher terminal rate.

Physical players moved from short to neutral

The FOMC will make their next monetary policy announcement on 15 June
(02:00 SGT). Consensus amongst analysts (65 out of 78 based on
Bloomberg’s poll as of 30 May) calls for a 25bps hike in the FED funds
rate from 1.00% to 1.25% and their position is backed up by market based
pricing with implied probabilities derived from FED funds futures fully
pricing in the event since 03 May. Our US economist is also calling for
a hike at the June FOMC followed by another 25bps in September.

    It is well known that crude oil non-commercial positioning has risen
to newheights, particularly in WTI, less so in Brent. Not often
mentioned is the fact thatpositioning by producers, merchants,
processors and users also conspired to helpoil prices move higher. Since
mid 2017, commercial WTI positioning has movedfrom short -200 k
contracts to neutral. The change is comparable to the move
innon-commercial positioning over the same period, +263 k contracts.

    It is well known that crude oil non-commercial positioning has risen
to newheights, particularly in WTI, less so in Brent. Not often
mentioned is the fact thatpositioning by producers, merchants,
processors and users also conspired to helpoil prices move higher. Since
mid 2017, commercial WTI positioning has movedfrom short -200k contracts
to neutral. The change is comparable to the move innon-commercial
positioning over the same period, +263k contracts.

    3M US Libor has shifted higher by around 3bps in May to 1.20% and
the adjustment path has been in a controlled fashion. 3M SOR on the
other hand averaged at 0.78% for the month of May with a high low range
of 6bps (0.82% to 0.76%). The average 3M SOR declined in May by around
8bps compared to its April’s average. Divergent paths between US Libors
and SORs has been the result of weaker USD performance particularly
against its developed market peers, May’s average DXY index value fell
by 1.75% compared to April’s average while Asian currencies also
recorded gains against the USD with ADXY gaining by 0.28% on average
month on month. In addition to weaker USD performance in May, USDSGD FX
swaps have also been capped by low volatility and ample domestic
liquidity. 3M USDSGD FX swap slid deeper into discount in May to -14.8
pips on average compared to April’s average of -11.3 pips off the back
of declining 1M implied volatility which fell from an average of 5.10%
in April to 4.20% in May.

    Implied vol has drifted lower through H2’17 in Europe across
sectors. Asdiscussed in our 2018 Volatility Outlook1, we expect a
continuation of this regime.

    This suggests that industrial users have been more aggressive than a
year ago inadding WTI hedges to secure purchase prices than producers
have been in lockingin sale prices. Our US oil & gas analyst team’s
assessment of hedge ratios showsthat current 2017/18producer hedging of
33%/16% is rather similar to last year’s2016/17hedge ratios of 34%/13%.
Such neutral commercial WTI positioning hasbeen rare in the last ten
years, Figure 4, and would only have to rise by a further69k contracts
to match the previous high of +60k contracts in August 2013.Commercial
hedging has been more static in Brent, however, where positioningis
little changed from a year ago and remains heavily net short, Figure

    3M Libor and SOR were at 1.20% and 0.79% respectively on 30th May. A
check against historical observations when the FED funds rate was
previously at 1.25% fits with our expectations that 3M Libor will
continue to grind higher as we close in on June’s FOMC. 3M SORs on the
other hand is close to fair value for the next FED hike and is likely to
remain contained between 0.70% to 0.90% under the current volatility and
liquidity environment. We are cognizant that sanity checks against
history is simplist ic since it does not control for differences in
liquidity conditions, credit risk appetite and FED funds expectations to
name but a few. However, what does not repeat can still rhyme, though
when we overlay the current environment of extraordinary Central Bank
accommodation, tail outcomes this time round may be more contingent on
policy missteps.

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