The NZD-AUD 5Y*5Y differential has narrowed beyond -20bp. Historically it’s only been materially negative when the RBA target rate is well over the RBNZ target rate, or when the RBNZ was discussing negative rates and aggressively doing QE in 2020.
Macro momentum and the RBA’s recently increased hawkishness have justified compression but it’s looking overdone. The 10Y NZD-AUD spread is very tight relative to our model.
We recommend paying NZD vs AUD 5Y*5Y swap at -22bp, targeting a widening to +20bp with a stop loss at -40bp. The key risk is that RBA pricing moves substantially higher than RBNZ pricing
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