Citi receives Euribor futures on French stress, sees lower euro

Citi has purchased December 2027 Euribor futures against December 2027 Swiss franc futures, anticipating a weaker euro. This prediction stems from French market stress, which remains contained within France and does not threaten a broader European financial crisis, according to the bank. French spreads have reverted to levels similar to those seen during the European debt crisis, but other European stress signals have not risen to comparable heights.

Citi highlights France and Belgium as the most vulnerable economies, yet their risk exposure is far less severe compared to the financial instability experienced by weaker European credits in 2011. The bank predicts that France will not experience immediate relief as it approaches its election period. Citi also projects that the European Central Bank will not be capable of raising interest rates in alignment with current market expectations.

The firm sells the euro against a range of G10 currencies, where the positioning is less concentrated than against the U.S. dollar. Additionally, Citi has established positions for the euro to depreciate relative to the U.S. dollar and the South Korean won via dual digital options. The bank has also increased exposure to risk in Brazil and notes Brazil's 2031 bonds, following the election outcome, which it describes as highly optimistic.

Based on prediction markets and polling data, Citi suggests that the end of the Lula era is near. The financial institution had taken a long position in the Brazilian real before the election and has since added longs in Brazilian equities (Bovespa) and NTNF 2031 bonds on a foreign exchange unhedged basis. Citi expects Brazil’s Central Bank (Copom) to likely maintain its easing cycle, which should benefit Bovespa equities.

The bank also notes that Brazilian equities exhibit a much higher information ratio during periods of easing rates compared to times of rate hikes or periods of stability. Lower interest rates are expected to serve as a catalyst for both trades, according to Citi.