J.P.Morgan Recommend Long IRU4 Vs. SFRU4

J.P.Morgan note that since late June the SOFR curve has taken out 60bp of Fed cuts for end-2024, but the IRU4-SFRU4 yield spread has only narrowed around 20bp.”

• “This is a significant underperformance in AUD in the context of policy inertia (the high-hold) becoming a more consensus global scenario.”
• “Put another way, the RBA is still assumed to make up substantial ground (80bp) on the Fed inside a year, and now with a mix that is more reliant on the RBA hiking as the Fed cuts, which seems unlikely.”
• As such, they recommend being long IRU4 vs. SFRU4.
• They note that “this trade would work on another hawkish Fed repricing, but also on a sharp risk-off ‘flash rally’, since the RBA curve would become live for cuts too.”
• “It loses if the RBA truly has a lot more work to do and delivers an independent burst of tightening into 1H24.”
• “But significant further tightening also seems unnecessary given how much consumption has already slowed.”