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From a central bank perspective, the RBA continues to keep the faith in the 3% growth story for Australia. In its most recent communication, the RBA acknowledged the likely softness in 1Q GDP but refrained from reading too much into a weak print.
Our RBA outlook (on hold for some time) is anchoring front end valuations. We expect 3yr swap rates to remain in a 1.8% to 2.3% range, with core inflation still below 2%.
On the flip side, the RBNZ has signaled the next cycle – a tightening one – will not start until the end of 2019. That will anchor the short end, although markets will not abandon their expectations for tightening as early as mid-2018 which would imply that occasional spikes in the 2yr will be likely. A 2yr swap range of 2.10%-2.60% is expected. The long end will continue to follow US yields, which we expect to rise. That means the curve steepening trend should continue.
Buy a 2-month AUDNZD 1.09-1.11-1.13 1x2x1 call fly,
Buy 1M AUDUSD vs AUDNZD vol spread, equal vega.
Alternatively, aggressive bears can bid NZDJPY 1m2m IVs & RR and buy 75 NZDJPY OTM put of mid-month tenors, sell a 1m in premium-rebate notionals.
