Long risk reversal on ERZ5

Fear of inflation not converging to 2% in the Eurozone has underpinned the recent repricing of ECB policy expectations. We don’t share this concern, at this stage. In the meantime, growth downside risk has been put under the mattress. We think this risk is underestimated by the market and will soon get repriced in the short end of € curves. We buy a 98.375 ERZ5 call and sell a 97.5 ERZ5 put to express this view at a (close to) zero cost , with a lower volatility than an outright long position in the futures market.