Trade Write-Ups: LEVERAGED TRADE IDEA

Australia is changing

Trade Thesis:

Australia is moving through the late-cycle “plateau” phase rather than tumbling into recession. The trimmed-mean CPI print for Q1 came in at 2.9 % y/y, the first time core inflation has slipped back inside the RBA’s 2-3 % target since 2021, yet the quarterly pace was still 0.9 %—too sticky for an aggressive easing campaign. Labour-market data tell the same slow-cooling story: unemployment only nudged up to 4.1 % in March with under-employment steady at 5.9 %; hours worked are drifting sideways, not collapsing — evidence that firms are hoarding labour and preserving wage growth near the 3¾ % mark. Meanwhile, the housing market has already resumed its climb: CoreLogic’s Home-Value Index set a fresh record after a 0.4 % rise in March, buoyed by strong net migration and a chronically tight rental stock. Put fiscal policy into the mix—July’s A$17 bn Stage-3 tax cuts—and household disposable income is poised for a mid-year boost. In short, growth is slowing but still firmly positive, inflation is easing but not vanquished, and policy support is coming down the tracks.

Markets, however, have leapt to the conclusion that Australia will shadow the Fed into a rapid-fire easing cycle, with the front of the strip now pricing four cuts by December 2025 and five by December 2026. That path looks incongruous with sticky services inflation, a still-tight jobs market, resurging house prices and a new fiscal impulse.

BOTTOM LINE: This is a significant opportunity to get short the short end of the Australian curve.

The Australian Equity market has been rallying aggressively during this time, indicating significant strength:

The most optimal expression is short Z5 and Z6 contracts in Australia.

Short IRZ2025:

Short IRZ2026:

Taking a smaller degree of duration risk in terms of position size is reasonable with the 10 year bond in Australia: short Australian 10 year

Long AUDJPY as an FX expression: This is less direct but we are likely to see the Australian dollar rally against the Yen as rates in Australia move marginally higher.

US NFP is likely to move these positions around tomorrow. if the trades go against the thesis, it is likely an opportunity to double down due to the unrealistic pricing taking place.

Cheers:

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