AUD: Data support further front-end outperformance – BNPP

Altaz Dagha, Research Analyst at BNP Paribas, suggests that the Australian labour market continues to show underlying fragility.

Key Quotes

“Another disappointing update on the labour market in January data again reflects the ongoing theme of part-time job creation at the expense of full-time, and a falling participation rate. Overall, while these data are unlikely to sway the Reserve Bank of Australia from moving away from a neutral stance in the near term, it confirms to us that the central bank is unlikely to be in a position to tighten over the next twelve months, particularly after the soft Q4 CPI print.”

“Curve steepeners, both in the belly and the long end, still make sense, in our view. With risks still skewed towards further easing this year but the level of rates already low, the market is unlikely to price in a prolonged easing cycle. Paying 2y1y/3y1y should perform if the market prices in an easing bias again, but also if there is a global, long-end selloff. We also continue to recommend 5s10s steepeners, as the segment has lagged the move in the broader curve.” 

“Cross market trades offer protection in a sell-off. The underlying weakness in the labour market data, in addition to the soft AU Q4 CPI print earlier in the month, leaves us comfortable recommending longs in the front end at current levels. However, given the drag of global rates, we prefer to be received on a cross market basis versus the US. The market has again priced in a modest tightening bias for Q1 2018 following the US led sell-off this week, and rolldown in the 1y1y space has increased to 3bp/month. Even so, AU has outperformed US during the past week’s sell-off so we are comfortable with the view that front-end rate differentials will compress further, as the AU front end remains relatively anchored whilst the US is vulnerable to a further repricing. We maintain our recommendation to be received 1y1y AU-US targeting a move to 5bp.”