Australian Rates Trade

Trade: Short Australian rates futures

Current market pricing and mentality: at the moment in the Australian rates market the sentiment

has become stronger and stronger that the RBA will drop rates due to slowing growth and household

leverage pressure.

The RBA has only now started to come to terms with a more dovish monetary stance in order to keep

Australia out of a recession.

This being said, the RBA does still seem hesitant to drop rates and have taken any excuse to hold it off.

An example of this was late 2017/ early 2018 when iron ore prices propped up depressed growth.

As a result of Australia’s poor current economic position, rates markets have priced in an aggressive

dovish prediction, with short term paper currently trading at 1.31%, 19 bps lower than the cash rate.

This not only offers a positive carry on a short position (assuming your account earns the overnight

cash rate), but is priced 6 bps away from a rate drop, and 19 away from remaining the same.

This offers a 3:1 payoff (simply put) for the trade, and has a positive carry.

The catalyst for Idea: what has changed, however, is the future amount of fiscal stimulus relative to

monetary. The Liberal party plan on decreasing corporate and income tax, which in the long term

may impact negatively, but in the short term will definitely be a positive. By having on average

~$1080 more on their tax returns, families will be able to spend more and feel less strain on their

mortgages (household leverage). As a result, this should, just like in late 2017, prop up the economic

data so that the RBA does not feel obligated to drop rates. Thus leading to a snack back of futures

back to the current overnight rate.

The catalyst for trade: The catalyst for the trade is simply the first economic set of economic data

that occurs after the implementation of the tax changes.

Details of trade: The time frame for this trade is less than 6 months. The expected profit for this trade

are +19 bps un-leverage (1.9%+ with leverage) and the expected downside is 6 bps

(0.60% with leverage).