AUS Rates – Markets getting exciting now! AUDUSD in particular coming under pressure as Iron Ore and metals simultaneously look to be correcting. Old Dr Copper in particular seems one to keep an eye on given record long positioning and a major trend about to be tested which could have important implications given its status as China’s growth proxy- keep an eye on USDCNH breaking 6.50. The confluence of this combined with USD short positioning makes short AUD fx the best trade here for mine. Interesting 5y EFP a touch tighter today – think we could see a decent repositioning in to belly received over the next few weeks, would think balance sheets thinking similar too in terms of belly receiving. My gut feel is market is actually short XM here, would be trying to chase a correction in the futures, don’t think we are far away from a quick move back to 98.00. There is already a lot of pain out there, particularly for long/short HFS, and can’t help but think the worst is still to come.

 

From Tuesday- AUS rates- H1->2s5s10s trades @ -26.1 (suspected receiving off -25.5 mid). Aus bonds trading with a surprising offer tone since London came in on this Australia day session with XM underperforming TY (XMTY 4bps). The selling seems symptomatic of misplaced taper nerves ahead of next week’s RBA which was a significant factor in a stern rejection of my receive 3y2y idea at ~85.5bps last week. AUDUSD isn’t fairing so well as its current uptrend looks like it could under some pressure this week, watching 0.7650 level to sell the break particularly after yesterday’s porous risk climate. Responses from HF and prop clients indicated a preference to look at paid belly expressions (mostly on spread and fly) as opposed to any outright received trades at the moment. Dealers are reflecting similar sentiments from their RM clientele who seem to prefer to still wait before engaging in the belly. XM current 91/91.5 and think it looks good buying at these levels in our opinion.

 

From: James Fay
Sent: 20 January 2021 11:18
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>
Subject: Aus Rates – 20th Dec – 5yr in Focus

 

Anton Van Camp’s Thoughts….

Been an increase of activity in VTAH1 trade in Sydney today which is generating conversation in London, particularly from the offshore HF community. Find it interesting that it coincided with one bank recommending to pay 5y EFP (vs VTAH1 @ -0.75). The largely QE predicated basis for paying EFPs all feels very much in the price at this point given the recent move higher with short to medium term direction more likely to be dictated by outright IRS flows and futures direction. As a result positioning is now very firmly skewed to pay EFPs (danger!) with multiple banks echoing similar QE based sentiments.

 

Personally I feel little more circumspect on EFPs here (particularly in the belly) given how attractive carry/roll now looks in that part of the curve and the risk of further technical weakness in futures contracts. This exposure is only added to by current speculative paid spread positions. Receiving 3y2y you can pick up over 2.5bps per month which is about as good as it gets and if the fundamental outlook weakens funds will rush to that part of the curve. In the belly of the AUD IRS curve you are also going to have balance sheet receiving in to accrual books who will find these levels of carry hard to ignore in 2s5s and 3s5s. A formidable headwind. On the other side of the coin would also find it disconcerting having the tail risk to an RBA pull back from YCC and no hike guidance.

 

I think on something like this I would be more inclined to receive 3y2y IRS and look to be short FV or TY against given the current global focus of markets and would perhaps express using the futures put options given my bias to bond strength.

 

 

From: James Fay
Sent: 07 January 2021 09:31
To: jf@archr.com
Subject: Aussie Rates

 

Decent XM volumes again so far today with dealers continuing to report good RM demand which has XMTY back to the bottom of the 5-10 range we have been bouncing around. Late in London yesterday there looked like some interest to receive 5y5y was starting to develop with 2x clips of 130mm+ printing (recouped to 1.75) which has kept EFPs offered in Sydney (along with suspected CTA selling).

 

So far in London spot 1y1y has traded at 11.5 in 320mm+. Back in Dec it felt like dealers were starting to build inventory in received positions in the reds with 1y1y trading around 15.5 and now starting to recycle to clients as ESA balances increase and expectations for a negative bbsw grow although have seen some HF interest to take profit in to the recent bid in whites.

 

Also look to be a bit more activity in the belly today in London and perhaps a function of yesterdays 5y5y flow creating some liquidity/axes around that point and in 3s5s10s. 5y has traded 130mm+ @ 40.25 as well as what look like a number of flies aswell including 3s5s10s @ -39. Carry is again starting to look compelling in a QE/YCC world again so might need to be careful with aforementioned paid EFP views and probably look to be a bit more tactical around this bias. Additional SDR trade -> 4y2y vs 6y2y @ 61.5bps

 

 

From: James Fay
Sent: 03 December 2020 12:10
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>; Ashley Joye <Ashley.Joye@archr.com>
Subject: Aus Rates – 3rd Dec

 

AUS Rates – All a bit dazed and confused by YM price action on the desk here.. We’ve had considerable buy interest today. After checking the street for axed block sellers and finding none we lifted close to 15k on screen with the market going bid over on 10k at one point at 81.5. 25k have now traded at 81.5 and back offered on 3k with the buying coming almost exclusively from dealers. Its been well discussed the CTA selling in XM but perhaps this is also occurring in YM at these levels with OTC dealers not seeing the flow being processed on screen. This futures focused dynamic has caused both 3y and 10y EFPs to retreat from recent wides which creates a nice opportunity to repay (we like paying 10y @ -4 -> current screen mids) and XMTY to push to what are widely considered extreme levels, currently 8.25bps. Another interesting wrinkle is larger than usual domestic ACGB book selling since Dec 1 which seem to be conspiring to add to the recent heaviness, hard to imagine with levels here of the baskets that this would be anything but outright selling. Our client base seems to becoming increasingly weary that this sell off in XM could extend, particularly those technically focused….

 

 

 

From: James Fay
Sent: 01 December 2020 07:58
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>; Ashley Joye <Ashley.Joye@archr.com>
Subject: Aus Rates – 1st De

 

AUS Rates – The XMTY move this morning has been the catalyst for a few deep sighs as -TY/+XM positions feel the pinch amidst a month end bid to USTs. Levels are now deviating aggressively from popular opinion which is also being confirmed by systematic strategies (beyond stir adjusted) which place fair value almost 9bps tighter and hence are beginning to scale in to tightening positions with room to add. Adding to this and perhaps a possible level to target to fade -> 12bps would make 2 standard deviations from the mean over the past 6 months average. From a flow perspective we saw some large clips of XM selling from ACGB books in London and it seems this flow may have spilled over to the AUS session with no justifiable fundamental catalysts for the prolonged under-performance as futures bear the brunt of the move. One positive from this is that it has forced 10y EFP lower – we aren’t far off looking to pay this again and hoping for around -3 – -4 bps.

 

Feedback below re 12bps would make a 2 standard deviation move from the last 6 months average

 

xxxxxxxx

07:23:08 bit tricky to look at it that way

07:23:16 even though stir alone doesn’t lead to a good model

07:23:22 its the biggest driver of variance

07:23:40 and we had a cash rate cut during that period from rba, but not fed

07:24:00 best way to look at it is via residual analysis of a model

07:24:16 historically, it is profitable to XM/TY when it deviates by 5bp from fair

07:24:34 two s.d. for profitable trades is 8bp

 

From: James Fay
Sent: 24 November 2020 09:14
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>; Ashley Joye <Ashley.Joye@archr.com>; Alan Taylor <Alan.Taylor@archr.com>
Subject: RE: NZD Rates – 24th Nov

 

Feedback-

Looks like HSBC put out an idea today along similar lines, I worry about further belly weakness and crowding (similar to AUS that pushing EFPs wider) so not sure would be my cup of tea–

HSBC – “As we highlighted, the landscape developing in NZ property was never going to allow negative rates but by the same token, this is not going to land as a formal objective and you could argue it is already caught within the stability role …. To me it just reinforces that macro pru comes more aggressively and perhaps sooner….. not rate hikes. This is not a tidal shift for the RBNZ. This is a PR stunt from the govt to diffuse public frustration in the state of housing. Fade this move.

Rec 2y2y @ 52bp. 2s4s at the wides. Looking to add as stops continue to take us higher.”

From a macro currency focused trader:

“NZD has been on a wild ride this year, starting off weak as yields and rates caught up to the rest of the world and then was completely obliterated by an unwind of carry trades that were funded from the Euro area and Japan. Throughout this process NZD faced a few crosscurrents with NZ equities and banks persistently outperforming implying a strong capital flow story while ultra easy rbnz policy meant liquidity conditions were relatively easier, especially compared to EU. As these crosscurrents continue to normalise as rbnz adopt a more neutral stance, EU financial conditions remain much tighter relative to other DMs and specs are very long EUR. There is a huge amount scope for EURNZD to trade much lower as the positive capital flow story is likely to be reinforced by a relatively more dovish ECB as the European economy continues to flounder, likely challenging that large spec long position along the way”

HF rates focused:

08:31:42 I was meant to pay nz rates Monday according to my plan.. Ended up doing only au so biting myself a bit even though I got the direction right

08:31:53 As the move should be largely done now

08:31:58 Back to Orr

08:35:03 He must be plotting next move.. If this + cycle improving means negative rates off the table, I think he’ll want to perhaps firm up forward guidance to prevent rates from selling off too much.. And given they’ll be thinking of how to tackle house prices likely by targeted measures (LVR/Macro pru) instead of using the blunt rates tool (ie how do we run loose policy for non-housing related parts of the economy), will they also ask how they weaken the currency if negative rates aren’t happening

08:35:27 Probably some wishful thinking in there, most likely won’t have a lot of policy innovations from either au or nz next couple of months

Bank trader:

“Would also mention Orr’s response highlighting need more than monetary policy to solve property price issues. The speed with which he responded would highlight his willingness to keep rates low for a long time. I like irh1 vs zbh1 yes. also mention the possibility of rbnz moving depo rates in addition to ocr. This will lead to lower bkbm making carry and roll more attractive for kiwi”

 

 

From: James Fay
Sent: 24 November 2020 08:55
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>; Ashley Joye <Ashley.Joye@archr.com>; Alan Taylor <Alan.Taylor@archr.com>
Subject: NZD Rates – 24th Nov

 

Anton Van Camp’s NZD commentary……

NZ Rates (24^th Nov) – The policy outlook continues to evolve domestically in characteristically illiquid and one directional trade. A suspected 5y RM paying program commencing post vaccine around Nov 9^th (5y 20bps) has now been accompanied by seasonal mortgage book paying, aged HF received unwinds in to year end and now increasingly hawkish but typically polarizing RBNZ commentary. We mentioned on Nov 12 (below) that this move could extend beyond the rational (2y kiwi +8.5bps today) and given the RBNZs track record of loose comments detaching market levels to still questionable fundamentals we are going to choose to look through todays comments and rather begin to approach these levels as very attractive to begin to scale in to received views. Identifying the least traumatising expression is the challenge. With risk appetite remaining low and and seasonals suggesting the risk of further softness, we’re looking for decent risk/reward plays to fade some of this move. Long ZBH1 (76) or M1 (76) appear to offer decent opportunities. Sizing feels  key, and we leave room to add on additional weakness. Would love to hear some trade suggestions as was also intrigued by long ZBH1 (76 offered) vs short IRH1 (98) @ 22bps.

Some previous thoughts……

From Nov 12 – AUS/NZD rates – Very tough week for NZD rates as a Molotov cocktail of vaccine news/RBNZ/positioning and an RM belly unwind program floods the street with paying. NZ/AUS 5y has had a range of -13 – +15 bps on the week. There are 12x clips of recouped 5y on SDR so far this week of varying sizes emblematic of RM paying. As a desk we started seeing buying in to the dip in ZBs late in London yesterday lifting ZBH1 up to 79 from 77 on the back of flow from non-NZD focused clientele whilst being axed sellers further out towards the back whites and reds. I expect some interest will continue to develop to fade the move in NZD OIS but feels premature at this point given the level of positioning to clean up in the 6m6m area with the added grenade of impending year end the catalyst for further unwinds. Get the feeling may-nov 2021 rbnz ois has another leg higher and wouldn’t rule out a move extending beyond the rational. Somewhat troubling that the RBNZ had the opportunity to walk it back today via Hawkesby speech but chose not to and reiterated that NIRP depends on the efficacy of FLP which will be implemented in dec and will take some time to evaluate

 

From 9th September – NZD rates- Dont think we are far off setting some shorts off ZBM1 or paying 1y. Canvassing dealers and no one seeing much balance sheet paying so leads me to believe all sitting received. Think this bears keeping track of given they are by far the biggest counterparty in the market and less concerned with HF driven mtm moves which have dominated of late. Market has recently been inundated with new 1y1y receiving. Particularly leading up to Orrs speech last week with large clips of spot date 1y1y printing around -3bps to -6bps. This will leave majority of dealers received 1y bucket which will be difficult to clear so think probably sitting on this risk and in flatteners clearing delta via receiving 2y and out which is why 1s2s has flattened so aggressively. Difficult to stand in the way of CB activity but with Orr being notoriously mercurial, fears of wealth inequality and the property market heating up im not willing to rule out some sort of unexpected tail move just yet and willing to explore the idea of a nasty and entirely irrational positioning led squeeze around the 1y point. Sell ZBM1 @ 14

 

 

From: James Fay
Sent: 19 November 2020 10:28
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>
Subject: RE: Aussie Rates – Archr – 19th Nov

 

Some macro feedback to today’s dribble below if you’re interested…….

“I don’t think that investors’ concerns regarding risk moving forward is about faith in the vaccine or not.. It’s that one side effect of a pandemic and then a vaccine is all countries are incredibly in sync and reliant on each other. The enormous risk is that a vaccine sets up a situation where businesses, households, banks and governments all look to derisk their balance sheet or maybe are more risk averse. Individually it makes sense but if everyone is in sync, especially because we all get the vaccine at the same time, and everyone does that at the same time then there will be huge troubles as profits will slow followed up slowing growth. The risk isn’t the roll out of the vaccine it’s the potential slowing of stimulus and potential changed behaviour that accompanies it”

“AUDJPY is sensitive to us real yield. Only reason real yield will rise is to reflect improving growth prospects or tightening conditions. Combo of higher real yield + higher volatility = tightening conditions and lower audjpy and higher real yield + lower volatility = improving growth prospects and higher audjpy”

 

From: James Fay
Sent: 19 November 2020 09:56
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>
Subject: Aussie Rates – Archr – 19th Nov

 

AUDJPY looking fragile here underlining the general risk cautious tone prevailing for markets today (NZD underperforming other G10 crosses). A break of 75.50 in AUDJPY portends further weakness. UST 10s30s has now clearly broken through 74.30bps and appears to be struggling with positioning and renewed demand from Asian investors. Continue to hear reports from UST dealers that real money is still quite underweight, with no long end supply to come for 3 weeks, which is why every supply dip is bought and undermining the impact of recent positive vaccine headlines. How this materialises in thinner year end liquidity could get interesting particularly as expectations grow of the Fed extending WAM. As a result seeing more interest in TY calls this morning as Winter looms and the market comes to terms with the fact they are placing a lot of faith in American pharmaceuticals as the saviour of humanity. A questionable notion given up until now their only motivation has been to bankrupt the American working class.

 

Gold continues to struggle and can’t help but think this is a reaction to US breaks drifting back lower and forcing up real yields. One to watch we think.

Also, 10y EFP mid now -0.375…..

 

 

From: James Fay
Sent: 18 November 2020 10:18
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>
Subject: Aussie Rates – Archr

 

AUS Rates – A flurry of activity in early SYCOM instigated by both swap and ACGB dealers on midcurve paying. XM chased from 11 down to 9.5 offered whilst TY stable around 11/11+. 10y EFP bloomy mids got to -0.875 and feels as though getting a little disorderly as swap liquidity deteriorates. All materialised a little quicker than anticipated but would look to scale out of 50% of our 10y EFP idea around this area with more lofty ambitions on the remainder given the combination of still current received positioning and the hellstorm CBs still have to navigate. (entered at -6 on Nov10). The recent RBNZ turn is particularly concerning and can’ see the RBA coming under similar pressure which can still see red bills lower. Watching to see if 1y1y can get to 20bps before being tempted in to longs there as dealer positioning already appears to be cleaning out in recent sessions. Would be restricting longs to the reds and ignoring temptation to move further out the curve.

 

From: James Fay
Sent: 17 November 2020 14:36
To: jf@archr.com; Anton Van Camp <anton.vancamp@archr.com>
Subject: Aussie Rates – Archr

 

AUS Rates – The AOFM announced that the syndicated tap of the 2.75% 21 May 2041 Treasury Bond has been priced at a yield to maturity of 1.70%. The issue size is $6.0 billion in face value terms. There was a total of $18.5 billion of bids at the final clearing price. Settlement of the issue will occur on 24 November 2020. Speaking to ACGB dealers in London and surprised the XM under-performance isn’t garnering more conversation given the demand for todays 41s syndication. After initial price guidance of 75.5-78.5 EFP the bond priced at the rich end of the range and is now bid at that level in London. Find it unusual that XM has under-performed TY by 5bps within that context so far this week, particularly given what we know about recent Japanese demand in the secondary market. Starting to sound like a broken record but to me this feels linked to a developing theme of larger then sustainable received IRS unwinds with a glut of PV’d tickets on SDR again today and trumping the outright demand for ACGBS. This is beginning to manifest in upwards pressure for 10y EFP starting to build with a -3.5 mid currently (+1.25bps). Would be very nervous about getting flowed in to a large received EFP position even here as we edge to the top of recent ranges given the confluence of further RBA QE, bottoming out volatility, growing fears of NH lockdowns and cracks appearing in recent risk on narratives.

 

From: James Fay
Sent: 12 November 2020 16:32
To: ‘jf@archr.com’ <jf@archr.com>; Anton Van Camp <anton.vancamp@archr.com>
Subject: Aussie Rates – Archr

 

Very busy day with the desk here trading roughly 30% of YM and 15% of XM volume over the session. Dealers weren’t keen to hang on to risk often happy to pay up to clear flows. With XM 7/7.5 around London open price action felt much better bid and would be inclined to check for blocks posted tomorrow in Sydney. Buying felt futures and ACGB led (midcurve buying) with swap dealers relatively quiet on the session which can be corroborated vs SDR showing no major flows of note and if anything indicated a preference to continue collapsing received structures in the belly. Watching this as a theme for the foreseeable with the market nervous about crowded IRS positioning and having recently sold XM to hedge. Fast money positioning feels notably cleaner now in futures in both YM and XM and seeing good demand to re-enter futures longs. Think we can see 10y EFP drift up towards flat over the next week or so.

 

From: James Fay
Sent: 11 November 2020 10:19
To: jf@archr.com
Subject: RE: Aus Rates

 

AUS rates- Feel somewhat validated on yesterday’s view with the way beta to futures broke down in EFPs today. Gut feeling is that this theme could persist for weeks now, leaving EFPs supported on dips, given the enthusiasm with which carry was pursued over the last 6 months in AUD and not to mention recent demand for AUS assets from Japanese Lifers in ultras (are they benefiting from AUDJPY move?). Feels like XM selling again proving the popular stop for received belly positions this morning which is escalating the potential for a futures led bull flattening/EFPs wider move. Markets are trading as if in sympathy to real yields edging higher and if risk assets can’t sustain that move then the reaction to this is going to be horrific. Feel like the liquidity issue of unwinding received positions has been added to with recent XM selling to cover delta of said positions with the liquidity risk now transferring to EFPs. The prospect of a sickening RBNZ proved true and the short end of NZ curve a worrying harbinger of what can happen when the market turns. As much as I hate to say it, feels like the pain will continue.

Also worth mentioning lack of RBA YCC enforcement today, and whether they come in tomorrow to calm the market, given where 3y bond and surroundings are trading??

 

HFs starting to buy XM in greater sizes now at 00/01.. Questions popping up on chat now if we starting to bottom.. Feel like conviction growing in rebuying AUS bonds ahead of RBA buying tomorrow.

 

From: James Fay
Sent: 10 November 2020 10:56
To: jf@archr.com
Cc: Anton Van Camp <anton.vancamp@archr.com>
Subject: Aus Rates

 

Some great commentary from Archr’s Anton Van Camp…..

What a demoralising sell off?! Having trouble wrapping head around the consequences of the recent vaccine news but what we can be sure of is that it has been the catalyst for a violent rethink of AUS rates positioning. The market completely ignored some fairly heinous CPI data in China today (0.5% vs 0.8%) and the implications this might have for an overindebted economy with real yields edging higher. Elsewhere copper (off 3% yesterday highs) certainly hasn’t traded the last 24hours as though we are about to embark on the great expansionary renaissance. The virus and subsequent policy response from the global CB community served as a distraction to deflationary/deglobalisation/structural issues for global markets that may still yet pose major challenges to the future. Consensus seems to be that CBs/governments still have a lot of work to do and a painful winter in the NH still on the horizon. RBNZ tomorrow takes added significance of being the first central bank response to the vaccine news…. A terrifying prospect given the combination of track record/positioning/liquidity!

 

I’ve been long and wrong but would still be sticking to the same approach. Short EURAUD or long AUDJPY as my risk on hedge as look to continue to buy dips in AUS rates. Today our flows have been decidedly balanced with a skew to buy XM from swap books. Surprising given the one way nature of price action and continued underperformance (XMTY +0.5bps). My thoughts are that IB futures desks would be quite busy responding to RM clientele selling XM as hedges for SUBSTANTIAL received belly trades (2y2y,3y2y,4y2y, 3y3y) that would be costly if not impossible to unwind in the current liquidity profile. This has had the effect of squeezing 10y EFP lower with the move exacerbated by stops from recent consensus paid 10y EFP and box trades as a QE view. Does the trade now become to fade this move in 10y EFP in anticipation of the swaps flows to follow, I like it and would pay 10y EFP around -6 with a stop -9.

 

James Fay Founding Partner T +44(0)20 7422 2978 M +44 (0)7500 988 788 E james.fay@archr.com 49 Carnaby Street, London, W1F 9PY United Kingdom ARCHR.COM

 

 

---

Archr LLP is Authorised and regulated by the Financial Conduct Authority (FCA reference 617163).
Archr LLP is not covered by the Financial Services Compensation Scheme (FSCS).
Archr is registered in England and Wales No. OC371018. Registered office 115B Drysdale Street, Hoxton, London, United Kingdom, N1 6ND

This message may contain confidential or privileged information. If you are not the intended recipient, please advise us immediately and delete this message. The unauthorised use, disclosure, distribution and/or copying of this email or any information it contains is prohibited.

This information is not, and should not be construed as, a recommendation, solicitation or offer to buy and sell any securities or related financial products. This information does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

You are receiving this email because you are a valued client of Archr.