RBC: Receive 9-Month AUD OIS

RBC recommend “receiving 9-month OIS at current levels (mid is around 1.02%) with a stop at 1.30% and a target of 0.50%. As our take-profit & stop levels imply, we are willing to hold to maturity if necessary.”

• “The trade is driven by the stretched levels of OIS pricing versus our forecast RBA cash rate profile. Markets are implying a cash rate of over 2% by year end, which we think is far too high. We expect the RBA to start hiking in June, but it strikes us as highly unlikely that they will take the cash rate that far, that fast. Our base case is for the target cash rate to end 2022 at 0.75%, with a terminal rate of 1.50% in this cycle reached only in 2024. Even if there is some upside to our end-22 cash rate forecasts, we think there is still decent value in this trade.”
• “We prefer to minimise our exposure to funding spreads for this trade as it’s targeting RBA policy directly, and hence we would rather receive OIS than buy bank bill futures or receive swap. But these alternate expressions should have a broadly similar risk/reward profile.”
• “Our previous attempt to fade market pricing in outright terms (receiving 6m1y) did not work out for us, but we think the time is ripe for another attempt given the latest moves in the front end and as we edge closer to RBA lift-off. We purposely keep this trade even shorter in timeframe, targeting only the RBA pricing for the remainder of this year. Markets can continue to price in a terminal RBA rate well above our forecasts, but this hurdle for this trade to be profitable is lower: we just need the cash rate to average less than ~1% over the next 9 months.”
• “We also drop our recommendation to sell May IBs at 99.88. This was always intended as a short-timeframe tactical trade to capitalize on our view of a likely earlier start to policy normalization. It may run a little further, but we think there are better opportunities such as the OIS trade. The other trades we are watching at the moment remain our suite of cross-market tighteners which focus on RBA terminal rate pricing (~3.5%) sitting too high relative to offshore counterparts.”