USD hedge costs are still edging lower – Nordea

Andreas Steno Larsen, an analyst at Nordea Markets, suggests that the trend towards lower USD hedge costs remains intact.

• “The Fed has more room to cut than the ECB, which leaves the lower hedge costs story fully alive. The xCcy basis has also “cheapened” from a hedging perspective, but that trend could reverse.
• We have called for cheaper USD hedge costs (hedging of USD income and USD assets) for some quarters in a row now and we remain comfortable with the direction of that call. The simple reason is that the Fed has more room to cut rates than the ECB and other comparable central banks.
• We, therefore, reiterate that rolls of existing USD asset hedges should be kept short on the curve (<3-4 months) to take advantage of the narrowing potential of USD-EUR spreads. Otherwise, it makes sense to add to USD hedges via the xCcy basis as it is the component of the USD hedge costs that could become more expensive seen from a European perspective. Markets currently agree with this narrative, with more cuts priced in from the Fed than the ECB. However, in our view the risk/reward relationship is in favour of further narrowing of the USD-EUR spread than priced in by the markets.”