RBC: Receive AU/U.S. 1y1y Above 40bp

RBC note that they "are looking to enter a received AU/U.S. 1y1y IRS narrower at ~40bp, depending on market conditions, with a stop of 60bp and a take-profit target at flat. This is intended to have a medium- to long-term horizon and should roll down positively over time given that the AU and U.S. have approximately the same base rates (in fact, libor is slightly above BBSW) yet 1y1y in AU sits 40bp above that in the US. We've been recommending front-end/belly AU/U.S. tighteners for some time now, but the volatility of the last few weeks has kept us from pulling the trigger again. Today, we set a revised level (40bp, about 3-4bp above the current market) where we would be happy to enter."

• "We think the RBA did enough on Tuesday to warrant some long overdue AU front-end outperformance, despite dropping YCC, by more realistically reframing guidance which maintains that hikes in 2022 (and even H123) are still highly unlikely. Wages growth is unlikely to be running at the 3-3.5% pace necessary for the RBA to be confident that core inflation will be sustainably within target and preferably around 2.5% in 2022. Our base case remains that hikes are an early 2023 proposition, with our wages forecasts firmer than the RBA's. For now, though, the market is likely to keep some hikes priced in for 2022, but we think it should step down from the ~4–5 hikes which were priced in at various stages over the last fortnight to around two at most and probably later in 2022, and then as time rolls on even these hikes should largely decay away. Meanwhile, on the Fed side of the equation, we think the risks are building that the Fed could hike multiple times next year."
• "The major event risk to the trade near-term is the Q3 wages print on 17 November. Markets are currently hypersensitive to inflation surprises (of both the wage and consumer varieties), as we saw in Australia following the Q3 core inflation print. We are mindful that even without a high quarterly reading, y/y wage growth will likely be the highest in years, but this is largely base effect after a very weak Q320. Governor Lowe will also deliver a speech on 16 November, a day ahead of the wages print, but we suspect that the communication from the latest board meeting and additional press conference means there won't be too many additional market-moving comments forthcoming."