Westpac Issue Tactical Trade Recommendation For RBA

Westpac have recommend paying 6-month/5-year swaps vs. receiving 6-month/10-year swaps at 57.5bp, with a target of 50bp and a stop at 60bp. They note that "this is a tactical trade around what we expect to be the messaging from the RBA following the July Board meeting. That is, they will acknowledge an improved forecast for growth and inflation, keeping the front pricing skewed toward more aggressive rate hikes than are currently priced-in. We also expect a renewed commitment to QE for longer than might have been the consensus, which will drag the bond curve flatter and the swap curve with it. In addition, we see much less inflation fear and the target zone for any fixed-rate hedges will be the 5- to 7-year part of the curve."