Westpac suggest entering a pay.........>

AUSSIE SWAPS: Westpac suggest entering a pay Aussie 2yr swaps vs. receiving NZ

2yr swaps position at -45bp, target of -25bp & stop at -55bp. Westpac writes

"AU-NZ swap spreads have fallen sharply since the RBNZ's on-hold decision on 13

Nov. Currently the RBA/RBNZ cash rate spread is -25bp (0.75%-1.00%), and we

forecast that spread to remain unch. in one year's time (0.75%-0.50%), with each

central bank seen cutting in Feb & then holding. Mkt pricing is slightly in

disagreement, the 1yr-ahead meeting data spread priced at -34bp (0.51% - 0.85%).

On this argument alone, we would be biased to paying AU-NZ yield spreads. That

bias is supported by a regression of the 2yr spread vs implied 1yr-ahead meeting

spread, the current 2yr spread level lying well below the historical avg.

Breaking down the -34bp forward cash spread in to its 2 components, we see that

the market is broadly priced for our RBA view & under-priced for our RBNZ view,

so we are more biased to receiving NZ than we are paying AU. However, both AU &

NZ cash pricing are heavily influenced by offshore action so this cross-mkt

spread allows us to insulate from some of that noise. The trade is also

conditionally supported by technicals. Carry estimates are currently positive."