FxWirePro: A tour on rates derivatives among antipodeans on both RBA and RBNZ’s continued dovish rhetoric

In this write-up, we are emphasizing on two central banks who are maintaining dovish rhetoric in their monetary policies and the rates trades.

In Australia, the RBA minutes from the March meeting made it clear the central bank requires more data to resolve discrepancies between growth and labor market outcomes. The phrase“...not a strong case for a near term adjustment in monetary policy” was retained, as was the assessment that probabilities around scenarios for hikes or cuts were more evenly balanced than they had been over the preceding year. While the Bank seems to rule out an April cut as it awaits for more clarity from the data, our economists continue to expect the RBA to ease 25bp in both July and August (RBA minutes suggest no rush to judgment). 

In New Zealand, we continue to see the central bank on hold across the forecast horizon.

The RBNZ is likely to repeat the key messages from February, including “OCR on hold through 2019 and 2020” and “the next move could be up or down.” Markets would be surprised by an unchanged statement from the RBNZ. Swap rates and the exchange rate would rise a bit.

We continue to think that growth will fall a bit short of the RBNZ’s forecasts, but the implications of a modest undershoot are fairly limited for now given a tight labor market. Rather, it is risks from offshore which could force the RBNZ’s hand, leaving us with a dovish bias to the policy outlook. The most dovish outcome for the RBNZ would be a combination of a softening labor market (risking the Bank’s new dual mandate) and rising external risks. For now, it is the latter risk that is most prominent, given slower growth in China and Australia.

Trade tips: Enter paid positions in the AUD 3s/10s swap/efp box. Book profits in received positions in AUD 1Yx3M swap vs USD 1Yx3M swap and NZD 1Y forward 1s4s flatteners. 

Hold the receiver position in AUD 5Y swap vs. NZD 5Y swap. 

Hold the long in AUD 3Y bonds. Stay received AUD Apr-19 OIS and short the belly of the ACGB Apr-24s vs. Nov-29s and May-21s butterfly. 

Hold NZD-USD 2Yx2Y spread compression trades and the underweight in semi-governments vs. ACGBs. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 38 levels (which is mildly bullish), while hourly USD spot index was at -91 (bearish), and NZD is at 139 (highly bullish) while articulating (at 13:36 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex