RBC Point To Need For Further RBA Tightening & Lean Lightly Into Paid Positions Deeper In ‘23

RBC write “at this stage, our sense is that the RBA is leaning toward a pause in April… We still believe the prudent path of action from the RBA remains more restrictive policy settings, but the when of further hikes is more challenging. May (rather than April) is certainly not out of the question given both recent volatility and the late-April timing of the quarterly inflation report. Fine-tuning timing may prove difficult though: we note that as time passes, the window for more hikes may be closing as we see weakening consumption into H223 given the accumulation of past moves plus larger fixed rate mortgage rollovers. Should the RBA pause in April though, we think it will be a hawkish one, unlike (for instance) the conditional pause enacted by the BoC which looks to have set the hurdle for further hikes quite high.”

• “Meeting odds for April and May have barely any implied probability of a hike, and pricing for subsequent meetings quickly turns into cuts.”
• “At this stage we think risk/reward thus quite clearly favours running short into the April meeting, but it may make more sense to be short via paid structures targeting the back half of the year (such as 6-month OIS) rather than April alone given these could still benefit on a hawkish pause scenario.”
• “We’d keep any positions very light though, with risks aplenty including the RBNZ the day after the RBA next week. Any hint of an impending pause from the RBNZ would likely see markets price in even more cuts from the RBA in the back half of the year.”