RBC Enter IRZ2/Z3 Vs. EDZ2/Z3 Box

Late on Thursday RBC noted that “while market pricing for RBA terminal remains elevated around 3.55% by February, it remains elevated for the rest of 2023 with only modest easing anticipated. The combination of more aggressive central banks and increasing risk of recession in a number of major economies should see the local market begin to price in more unwind of the 2022 hikes later in 2023.”

• “We opt to express front end inversion via a box trade, boxing an AU Dec22/Dec23 bills flattener (IRZ2/Z3) against a U.S. Eurodollar Dec22/Dec23 steepener (EDZ2/Z3). We choose to express the trade on a cross-market basis, as the U.S. curve has seen a significantly earlier and sharper inversion than the AU curve leaving the box spread between the two money market curves wide compared to levels seen at the start of the year. We see considerable scope for the Australian money market curve to move to catch up to the inversion already seen in the U.S.”
• “We enter the trade at 71.7bp, targeting flat and with a stop loss set at 110bp.”