BofA: Hawks Face Household Headwinds: Receive AUD 5y5y Swaps On A Cross-Market Basis

Bank of America recommend “positioning for tighter 5y5y cross-market spreads after the minutes of the RBA's October meeting signalled a hawkish bias.”

• “We see the new RBA Governor Michele Bullock's first Board minutes as neutral but the RBA's focus on CPI and labour market prints ahead of November's meeting suggest the Board will continue to emphasise upside risks for cash rates.”
• “Over the next few months, we see the RBA as unable to move in either direction as upward pressure from higher oil prices on headline inflation supports a hawkish bias but weakness in the consumer sector prevents the RBA from hiking.”
• “The risk to this view is that CPI surprises to the upside because of more than oil prices but this backdrop favours carry trades and richer duration, which is trading too steep on a cross-market basis given the divergent outlook for supply.
• “We recommend receiving 5y5y AUD swaps vs USD 5y5y swaps at 94bps with a target of 40bps and a stop of 120bps.”