FxWirePro: Take a Look at Rates Derivatives Ahead of RBA

Australia’s central bank is scheduled for monetary policy this week. The minutes of the RBA board meeting in March made it clear that the RBA requires more data to resolve discrepancies between growth and labor market outcomes.

While markets are pricing an easing bias from the Fed, the BoC, RBA and RBNZ, the central banks themselves have only pivoted to a neutral stance so far.

Australian government bond yields were also up on the Chinese data (10Y yields just above 1.80%, Caixin manufacturing PMI data prints upbeat numbers at 50.8) but Aussie equities and the AUD posted a surprisingly muted reaction, with investors perhaps reluctant to take positions ahead of tomorrow’s RBA Board meeting and pre-election fiscal budget announcement.

The chance of rate cuts in April or May have lessened. While the unemployment rate reached a new cycle low of 4.9% in February, forward indicators suggest strength is unlikely to sustain.

We expect the unemployment rate to rise to 5.2% by mid-19, and to 5.4% by end-19 

With close to 40-45bp now priced into the AUD OIS curve, we see little value in received positions on the OIS curve.

Calendar spreads in AUD vol may be an attractive way to position for a later easing; for example, selling 3Mx1Y receivers vs. 1Yx1Y receivers.

The RBA minutes also noted a detailed discussion on front end funding markets occurred at the March board meeting.

3Y bonds have rallied in the past week, removing most of their cheapness

relative to fair value.

However, if the RBA cuts the cash rate to 1%, then 3Y bond yield still have further to decline. 

Trade portfolio: 

Activate paid positions in the AUD 3s/10s swap/efp box. 

Take 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. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 29 levels (which is mildly bullish), while hourly USD spot index was at 50 (bullish), while articulating (at 11:35 GMT). 

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