Uncertainty over whether the ECB will be able to follow through on a rate hike signalled for April in the wake of the Japanese crisis has led some traders to position for a less aggressive tightening. European Central Bank President Jean-Claude Trichet indicated that the eurozone's 1 percent refinancing rate could be raised next month to stem inflationary pressures.
But a hefty bout of risk aversion since an earthquake and tsunami hit Japan on Friday and triggered a nuclear alert has thrown the ECB's policy moves into doubt. "While we believe the ECB has not changed its stance, it is hard to argue the risk factor over the probability has not changed. Japan is a big economy and there is so much uncertainty and it is hard to gauge what the impact is going to be," said Sean Maloney, rate strategist at Nomura.
BNP Paribas uses the two-week Eonia rate - currently around 70 basis points - as a base and with indexed swaps at April's ECB meeting indicating an overnight rate of 91 bps, that still shows expectations are for a hike, although it is not quite fully priced in.
The bank suggests trading the risk of unchanged interest rates in April via a steepener on the overnight indexed swaps curve between the dates of the ECB meetings in April and May, which currently stands at around 8 basis points. Benchmark three-month Libor rates were little changed at 1.12125 percent, with equivalent dollar rates also steady at 0.30900 percent.
Three-month yen Libor was steady at 0.20 percent after jumping a basis point on Tuesday. More worrying, RBS analysts said, would be if equity market falls and yen appreciation saw bank capital losses rise to the extent that banks were forced to scale back lending, adding further downside to the already shaky Japanese economy.
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