FXStreet (Delhi) – Renuka Fernandez, Senior Quantitative Strategist at TD Securities, suggests that the ECB meeting this week comes amid significant speculation about additional easing steps. Key Quotes “However, given the number of permutations of easing steps via deposit rate cut, current account limits/two-tiered deposit rate structure, QE extension or changes to QE rules, it is difficult to exactly pin down what the market is pricing in. We look at a variety of market indicators to tease out expectations and position for the meeting on Thursday.” • The risk-reward for trading the outright level of rates after the ECB is low in our opinion. We still hold on to our long 5y Germany against US and look to monetize if the ECB is more aggressive than expected. We look to buy US 10y against Bunds if that spread widens after the announcement. • Medium term we favour a steeper 2s10s Euro curve, as front end yields should remain pinned while long end yields should rise on higher growth and inflation expectations • We favour compression in periphery spreads as further ECB QE should support credit. In addition, if we see a switch away from a capital key weighting for bond purchases to total stock of debt, it would be even further supportive of tighter peripheral spreads. • If the ECB introduces upper limits on the current account, we could see an initial drift higher in Eonia as some excess liquidity is temporarily taken off the ECB balance sheet if the deposit rate cut is not large enough. Over time, however, Eonia should continue to track the rate which determines the marginal cost to banks. • We continue to expect the 5y EURUSD basis to fall (become more negative) on policy divergence with the Fed and as the supply of EUR relative to USD increases on further ECB QE.” For more information, read our latest forex news.