RBC Enter A 2s10s AUD IRS Flattener Vs. CAD Steepener

RBC note that “the Australian curve has lagged the global flattening move, with the RBA less advanced in its tightening cycle than other global central banks. Indeed, AUD remains one of the few G7 markets where 2s10s remains in positive territory.”

• “In contrast, the Bank of Canada has been one of the central banks setting the pace in the tightening cycle, with this month’s meeting having seen the BoC deliver a 100bp rate hike taking the policy rate to 2.50% (in contrast, the RBA’s cash rate target stands at just 1.35%).”
• “This front-loading of rate hikes, as well concerns over possibilities of a recession, has left the CAD 2s10s swaps curve (along with the USD, GBP, and NZD curves) firmly inverted.”
• “While the AUD 2s10s curve typically trades with a strong correlation (0.5) to the CAD curve, the lag in the RBA’s tightening cycle has seen the AU/CA 2s10s swap (3m BBSW/CDOR) box widen to the upper end of the range seen over the last 10 years.”
• “We expect this spread to revert as the Australian curve flattens further in the near term, as the RBA continues to front-load and catch up with its global peers (we expect a 50bp hike at next week’s meeting, followed by 50bp in September and a 25bp hike in each of October and November). In contrast, the Canadian curve has the potential to steepen as markets look towards the end of the BoC’s cycle, particularly given the read-across from last night’s FOMC meeting, with its discussion of a downshift in the pace of rate hikes.”
• “We enter a 2s10s AUD IRS flattener vs. CAD steepener (3m BBSW/CDOR) at 50.5bp, with a target of 5bp in the box spread and a stop of 75bp.”