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AUSSIE BONDS: Westpac write that "divergent monetary policy has been the major
driver of AU bond outperformance over recent years, with the Fed hiking and the
RBA either cutting or keeping rates on hold. This divergence remains the
dominant thematic, with Westpac continuing to expect stable rates in Australia
through 2020 while forecasting the Fed to deliver another 4 rate hikes. While
that view reflects the profile of the Fed's median "dot plot" for 2019, not
currently reflected in the 1yr forward AU-US cash spread. Should our forecasts
prevail, this strong relationship suggests that the spread will move to at least
-63bp in coming months. The spread has widened off its most narrow levels so,
now is an opportunity to re-set narrowers. Indeed, while AU bonds have
characteristically underperformed during the most recent UST rally, the spread
has in our view behaved quite well and in line with traditional relationships.
The trade is supported by relative supply trajectories throughout 2019 and by
any material correction to the AUD, which we expect, should also be supportive
for AU outperformance."
MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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