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RBC Looking To Enter IRZ2/Z3 Flattener

STIR

Late on Friday RBC noted that they have added a Dec ‘22/Dec ‘23 (IRZ2/Z3) bank bills futures flattener to their watch list.

  • They look for “any widening to around 40bp (comparable to levels seen earlier last week) before entering the trade.” They ultimately look for the spread to trade to 0, with a stop of 60bp, assuming their entry point is triggered. The trade is driven by their view that “market pricing for 2023 for the RBA is currently over aggressive, with the RBA likely to reach terminal earlier than anticipated by the market.” Note that they expect the RBA to move “comparatively quickly to a terminal rate of 2.85%, reaching it as early as November.”
  • They see “little reason to expect the RBA to continue hiking rates in 2023 (with or without a pause) particularly given central banks globally are likely to be approaching the end of their tightening cycle, and signs of a slowdown in growth are likely to be more apparent. In Australia, there is also a considerable degree of market-based tightening already built in to 2023, with fixed rate mortgages resetting at higher rates and the start of TFF repayments likely putting upward pressure on bank funding costs.”
“Even despite tightening considerably since the start of the year, the IRZ2/Z3 spread implies more than one full hike in 2023.”
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Late on Friday RBC noted that they have added a Dec ‘22/Dec ‘23 (IRZ2/Z3) bank bills futures flattener to their watch list.

  • They look for “any widening to around 40bp (comparable to levels seen earlier last week) before entering the trade.” They ultimately look for the spread to trade to 0, with a stop of 60bp, assuming their entry point is triggered. The trade is driven by their view that “market pricing for 2023 for the RBA is currently over aggressive, with the RBA likely to reach terminal earlier than anticipated by the market.” Note that they expect the RBA to move “comparatively quickly to a terminal rate of 2.85%, reaching it as early as November.”
  • They see “little reason to expect the RBA to continue hiking rates in 2023 (with or without a pause) particularly given central banks globally are likely to be approaching the end of their tightening cycle, and signs of a slowdown in growth are likely to be more apparent. In Australia, there is also a considerable degree of market-based tightening already built in to 2023, with fixed rate mortgages resetting at higher rates and the start of TFF repayments likely putting upward pressure on bank funding costs.”
“Even despite tightening considerably since the start of the year, the IRZ2/Z3 spread implies more than one full hike in 2023.”