This week felt like a declaration that we have now moved away from on-hold to global tightening phase. US CPI, Swedish unemployment, Australian employment, UK CPI/BoE/Vlieghe combo, SNB currency assessment change and whatever caused the higher Eurozone yields on Friday.
The Australian 90-day bills sell-off has now priced in 2.5 hikes for RBA in reds versus around 3 for BoC with BoC delivering first. I don’t like this pricing because the sentiment is different between the central banks. RBA have commented that growth is too low to hike.
Yet, if/once the sentiment changes, what stops RBA from hiking? Given Australian reputation as a high-yielder, 2.5 hikes for 5 (2 done + 3 to come) in Canada might seem too low, not too high. Reputation aside, BoC last year had a paper that showed a nominal neutral rate of 2.75-3.75% and RBA showed their neutral rate is 3.5% in July, so about same space to move higher.
I am not sure if it’s a good trade to bet on BoC versus RBA and if it should be through red STIRs or 10y bond futures. Given that 8th contract differential stood at 80 bps in 2016, pushing it now from 20 bps to negative doesn’t feel comfortable. Australian 2s10 is steeper than Canadian one, around 74 versus 40 bps, so long Australian 10y fut and short Canadian one is another option. A concern is that Australian 2s10 bear steepened while Canadian one bear flattened lately, so Australia-Canada 10y would be somewhat directional (and from this I infer that markets believe that Australia neutral rate can go up but it’s locked for Canada). The 10y spread between the two is also quite tight now by historical measures. I get a juicy rolldown to vol of 0.39 for long IR M9 - short BA M9, but the ratio is a lot lower for (back-of-the-envelope approximation) receiving Australian 10y rate and paying Canadian 10y rate (<0.1) that I use as a proxy for 10y gov futures.
2y swap differential is now zero between AUD and NZD, so perhaps praying for dormant RBNZ and reloading AUDNZD long around 1.09-1.095 is the most simple idea as it seems to have lagged the interest rate developments a lil bit.
Past two weeks haven’t been kind to iron, nickel and copper, but I am not sure further slump will deter RBA unless the prices go back to winter 2016 levels, and that would be a very long road down there.
The Australian 90-day bills sell-off has now priced in 2.5 hikes for RBA in reds versus around 3 for BoC with BoC delivering first. I don’t like this pricing because the sentiment is different between the central banks. RBA have commented that growth is too low to hike.
Yet, if/once the sentiment changes, what stops RBA from hiking? Given Australian reputation as a high-yielder, 2.5 hikes for 5 (2 done + 3 to come) in Canada might seem too low, not too high. Reputation aside, BoC last year had a paper that showed a nominal neutral rate of 2.75-3.75% and RBA showed their neutral rate is 3.5% in July, so about same space to move higher.
I am not sure if it’s a good trade to bet on BoC versus RBA and if it should be through red STIRs or 10y bond futures. Given that 8th contract differential stood at 80 bps in 2016, pushing it now from 20 bps to negative doesn’t feel comfortable. Australian 2s10 is steeper than Canadian one, around 74 versus 40 bps, so long Australian 10y fut and short Canadian one is another option. A concern is that Australian 2s10 bear steepened while Canadian one bear flattened lately, so Australia-Canada 10y would be somewhat directional (and from this I infer that markets believe that Australia neutral rate can go up but it’s locked for Canada). The 10y spread between the two is also quite tight now by historical measures. I get a juicy rolldown to vol of 0.39 for long IR M9 - short BA M9, but the ratio is a lot lower for (back-of-the-envelope approximation) receiving Australian 10y rate and paying Canadian 10y rate (<0.1) that I use as a proxy for 10y gov futures.
2y swap differential is now zero between AUD and NZD, so perhaps praying for dormant RBNZ and reloading AUDNZD long around 1.09-1.095 is the most simple idea as it seems to have lagged the interest rate developments a lil bit.
Past two weeks haven’t been kind to iron, nickel and copper, but I am not sure further slump will deter RBA unless the prices go back to winter 2016 levels, and that would be a very long road down there.