Westpac’s view is that softer energy and other commodity prices will provide some support to real incomes and encourage OECD growth to gradually stabilise and begin to recover over the course of Q3. But structural headwinds mean that the cyclical upswing in the major economies is likely to remain hesitant and uneven by historical standards. In this environment, the monetary policy normalisation process will remain slow, and as long as the sovereign risk crisis is contained, low policy rates will continue to anchor longer term yields. We may be at the lower end of the operative range for the major bond markets, but the upside is constrained for now.
We see opportunities to sell the DXY, sell EUR/CAD, sell JPY/KRW and buy dips in AUD in Q3. We like an Australian 2-5yr flattener 1yr forward, an Australian 3m3y swaption straddle and buying NZ inflation in Q3. We see limited activity in domestic corporates but remain positive on the RMBS sector as a whole in Q3. Finally, we see the end of QE2 as bad for commodities and like selling copper and buying gold in Q3.
Westpac Banking Corporation