Fixed Income: Weekly Strategy - commbank.com.au

Fixed Income: Weekly Strategy 2 October 2012

Adam Donaldson Head of Debt Research T. +612 9118 1095 E. [email protected] Alex Stanley Associate Analyst, Fixed Income T. +612 9118 1125 E. [email protected] Philip Brown Quantitative Strategist T. +612 9118 1090 E. [email protected] Michael Blythe Chief Economist T. +612 9118 1101 E. [email protected]

RBA endorses the lower for longer view on rates

RBA will need to further prime non-resource sectors to ensure economy retains momentum as resource capex peaks.

We expect some widening of swap spreads as European fears worsen and hedging flow increases.

We have taken profit on our Semi-Government exposure after a solid move tighter in spreads.

The RBA cut rates this afternoon as expected, by 25bp to 3.25%. The market had also come to expect a cut and only rallied a little today, though the total moves have been quite large over the past week. The 3Y rallied 3bp today, making a total of 23bp since last Monday. The 10Y has rallied 2bp today, making a total of 27bp since last Monday.

Australian bonds have clearly outperformed the US, where the 10Y Treasury has rallied 14bp since last Monday. The Aust-US 10Y spread has tightened to 135bp (inside our previous stated target of 140bp). But we continue to expect Australian bonds to outperform the US and extend the target to 110bp, in line with our forecast.

The RBA has for some time set the cash rate to control the “average” of the two-speed Australian economy, mining boom and all. In practice, that meant that the rest of the economy was being squeezed to create space for the mining boom. After slowly edging away from that view in recent months, the RBA explicitly and unmistakably moved on today.

In today’s statement, the RBA clearly outlines a future where weaker global growth constrains commodity prices and Australian resources investment peaks, then falls. To maintain economic growth against this backdrop “it will be important that the forecast strengthening in some other components of demand starts to occur”. This has been a central tenet of our ‘lower for longer’ call, and we continue to expect it will slowly play out over the next year or so.

The RBA’s change of heart makes another cut in rates before year-end likely. They will remain wary of triggering an unwanted boom in house prices, but given “credit growth has softened of late” the RBA has space to lower rates now. Australian rates should continue to fall and continue to outperform other markets (particularly the US).

While the RBA’s move looks to have prompted some receiving activity today (taking AUD swap further into record low territory), there is likely to be more hedging activity and outright paying of swap if rates do stay low. Alex Stanley explains on page 3 that swap spreads have been dominated by offshore influences in recent times but seem likely to edge wider from their current very tight levels.

Semi-Government spreads have also tightened significantly in recent weeks, but may struggle to perform further. We have taken profit on our long Semi-Government exposure (see page 6).

Offshore, the American markets will likely focus on the payrolls data scheduled for release on Friday night, while the Europeans will continue to play cat-and-mouse with an official Spanish bailout request. The Australian data continues to flow with the Building Approvals and Retail Sales result both scheduled for Thursday.

Contents:

Key Positions......................................................................... 2 Key Trades ............................................................................ 2 Where to for swap spreads? (First published on 28 September) ........................................................................... 3 Semis after the storm (First published on 27 September) ........................................................................... 6 RBA Board Meeting – October 2012 ..................................... 8 Key Views............................................................................ 10 CBA Forecasts: .................................................................... 12 Calendar – October 2012 .................................................... 13

Domestic fundamentals rather than global credit gyrations now driving AUD swap rates lower

Source: Bloomberg, CBA

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Global Markets Research

Fixed Income: Weekly Strategy

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Key Positions

Our recommended trades have performed fairly well in the rally. We are exposed to falling rates predominantly through our Aust-US 10Y spread trade. The spread tightened a further 12bp this week, and is now below our previous target of 140bp (see Figure). We think the Australian bonds will keep rallying and outperforming the US. We have lowered the target on the trade to 110bp, in line with our forecast, and tightened the stop to 147bp.

We have continued to lower credit risk in our portfolio of trades, taking profit on the QTC spread trade last week. After tightening significantly in previous weeks, the QTC trade no longer seems a good risk/reward proposition in the short-term. Any re-ignition of general credit risk (or widening of swap spreads) seems likely to see QTC underperform the ACGB. We maintain our QTC to NSWTC spreads trade though – we expect a slow roll-down.

Figure: Aust-US 10Y spread tightening

Source: CBA, Bloomberg

Key Trades

Trade Entry Current Profit Target Stop Comment Buy the TCV Jun-20 vs NSWTC May-20

0.5bp (16-Nov-11)

+1bp 0.5bp 10bp -5bp Hold: TCV’s AAA is safe and the funding task is modest. NSW is subject to some rating risk.

Buy the ACGB Aug-15 linker vs the Oct-15 (BEI to widen). Receive fixed in ZCS at 2.65%, creating

250bp (30-Mar-12)

Hold: We transformed the original trade by receiving ZCS against it. The trade is now (close to) a 14bp per annum annuity.

Receive the AUD 5Y Bills-Libor spread

33bp (25-Jun-12)

33bp +0bp 18bp 40bp Hold: We still believe the Bills/Libor should be tighter as the market calms.

Buy the Rabo Apr-15 against the ANZ May-15 on an ASW basis

47bp (4-Jul-12)

44bp +3bp+4bp carry = +7bp

30bp 60bp Hold: We think European risk aversion has pushed the Rabo too wide

Buy ACGB Apr-23 vs UST 10Y 163bp (13-Aug-12)

136bp +27bp 110bp 147bp Revised Target and Stop: With the RBA moving back to easing we think the AUD bonds will continue to outperform and shift target and stop accordingly.

Buy the QTC Nov-14 against the NSWTC Jul-14

13bp (17-Aug-12)

10bp +3bp 0bp 18bp Hold: We extend along the QTC curve to buy the Nov-14 vs the NSWTC Jul-14. This spread should slowly compress.

Buy the GPT 6.75% 2019 bond at 215bp ASW

215bp (17-Aug-12)

185bp +30bp 180bp 240bp Hold: The GPT bond should outperform once technical factors that have been holding it back begin to recede.

Buy the NSWTC Feb-17 vs the Apr-16

13bp (27-Aug-12)

14bp -1bp 5bp 17bp Hold: The NSWTC curve is too steep, particularly compared to ACGBs.

Buy the QTC Feb-18s against the ACGB Jan-18s

115bp (7-Sep-12)

107bp (27-Sep-12)

+8bp 80bp 125bp Profit Taken: We continue to like the QTC name. The 18s are much wider to bond than the shorter bonds.

Buy the Jun-16 ACGB on EFP basis 7.75bp (17-Sep-12)

7.50bp +0.25 2bp 10bp Hold: Futures roll has emphasised the dearness of the Dec-12 bond futures.

Pay AUD 3Y swap vs 1Y 2bp (20-Sep-12)

0bp -2bp 15bp -5bp Hold: A shift to imminent RBA cuts and/or a widening of 3Y EFP should steepen the front end.

Pay AUD 3Y EFP 60bp (28-Sep-12)

56bp

-4bp 75bp 53bp New Trade: We think the EFPs will widen, driven by offshore concerns and domestic paying interest.

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Where to for swap spreads? (First published on 28 September) Alex Stanley – Associate Analyst, Fixed Income – 61 2 9118 1125 – [email protected]

We analyse the drivers of swap spreads, after a volatile September.

Appetite for credit and EU sentiment are key drivers of swap spreads and other impacts have diminished over time.

Swap spreads are likely to widen in line with credit, with some paying pressure due to low outright levels an added influence.

We pay 3Y EFP.

Swap spreads have been volatile in September. EFPs crunched to 2012 lows and widened sharply again in the space of one week (Figure 1). In this article, we analyse the drivers of swap spreads by using a simple model of the 3Y spread. We find that financial credit risk remains a key driver of spreads, but that a more direct correlation between European CDS than Australian bank CDS has been prevalent since 2011. Other drivers of swap spreads, such as the shape of the curve and level of rates have been less important over the last year, but seem likely to play a bigger part if Eurozone credit stabilises. Bill/OIS spreads have consistently been an important driver of swap spreads.

Even after the widening moves of recent days, European and Australian financial CDS spreads are still near the tightest levels seen since March this year. The path of least resistance for global credit and Australian swap spreads looks to be wider. We sense that the recent positive support for credit from the ECB’s commitment to supporting peripheral sovereigns will struggle to take spreads much lower. Moreover, the cash market looks long and vulnerable to shocks, after USD 949bn worth of issuance since June 30 (a record for Q3).

A short term catalyst for wider spreads appears underway, with the re-emergence of market concerns over Spain in recent days. Spain will formally seek a bailout at some point (given upward pressure on yields in its absence), but the political backdrop doesn’t leave us with much confidence that the process will be managed smoothly. Nor does ECB buying adequately resolve the seemingly intractable economic issues, which, in turn, threaten to cascade into medium to long term credit stress for Europe and the world at large.

Beyond the critical issues in Europe, we see scope for record low swap rates to also play a part in pushing spreads wider. A risk to our view for wider spreads is a simultaneous rally in credit and outright Aussie rates for domestic reasons.

Figure 1: 3Y and 10Y EFP


Figure 2: Long term 3Y swap spread model (30d MA)


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Modelling swap spreads

We construct a simple model to explain the variation in the 3Y swap spread. Figure 2 illustrates the fit of our model (note we use the spread to physical bonds and not EFPs, to control for the impact of futures rolls).

The model attempts to measure a “fair value” for the 3Y swap spread. To do this, we estimate a regression with the following independent variables: the 3m BBSW/OIS spread, average 5Y CDS spread of 4 major banks, average daily change in the 3Y bond yield and the slope of the bill curve using the 1st and 7th contracts.

Overall, this model explains over 60% of the variation in swap spreads over the last 7 years. This model did a reasonable job of explaining the variation in swap spreads until the peak of the crisis in 2008/09 and again tracked spreads well in the recovery phase in 2009-2010. The long term model failed to capture much of the variation in swap spreads in 2011 and 2012. So what gives?

A closer examination of the variables in the model tells us that the drivers of swap spreads have indeed changed over the last year. The curve and level of rates factors have had a diminishing impact on spreads relative to the credit factors (CDS and bill/OIS spreads). The major bank CDS has also been less important than global CDS in explaining swap spreads. That’s somewhat surprising given that Australian bank credit risk is directly embedded within swap spreads.

However, medium term views on the riskiness of the Australian sovereign and banks have shifted over the last year and this affects swap spreads. Simply, foreign capital has flown into, and not away from, Australian bonds since 2011 (unlike in the 2008 crisis period). Our previous research has covered the impact of these flows on the CGS market in some depth, so we won’t repeat that analysis here. We simply note that the declining term yield premium in Australian bonds has contributed to wider swap spreads than our long term model can explain since 2011.

Data on foreign capital inflows to bonds is available only with a significant lag and so becomes useless for daily swap spread modelling purposes. Instead, we find that the intensity of the flight to quality bid for bonds is captured better with a variable measuring Eurozone credit risk – the major source of risk-off sentiment in markets over the last year. EU financial CDS spreads have clearly diverged from Australian major bank CDS over the last year (Figure 3). We estimate a short term model using EU financial CDS instead of Australian bank CDS and find a better explanation for swap spread variation. The fit of our shorter

Figure 3: iTraxx European senior financial CDS less average AUS major bank CDS spread


Figure 4: Short term 3Y swap spread model (daily spread)


Figure 5: 3Y swap and bond yield


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“Traditional” factors haven’t explained much of the variation in swap spreads since 2011.

European, rather than Australian CDS spreads are now more highly correlated with swap spreads.



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term model is illustrated in Figure 4.

Will Europe remain the dominant driver of swap spreads?

Our short term model tells us that EU developments have been the dominant driver of spreads since 2011. The level and curve drivers of swap spreads have been relatively less important. This situation seems likely to prevail for the time being. As the last few days have shown, there are great implementation and political risks surrounding the latest set of policies in Europe. So CDS spreads may struggle to hold near March lows.

A retreat in credit appetite seems likely to push swap spreads wider in the short term. When credit views begin to stabilise, then hedging flows and the shape of the curve have greater scope to impact swap spreads. There are a few signs emerging that the level of rates and the curve could add modest additional pay side pressure to swap spreads.

First, we note that front end rates are very low and the curve is flat out to 3Y. On Wednesday night, the 3Y swap rate hit a new all-time low of 2.93% and as we write is at just 2.97% - flat to the 1Y rate (Figures 5 and 6). Second, we note the improvement in business credit growth over the last year, following the long post-Lehmans deleveraging phase (Figure 7). However, the impact of hedging flows seems unlikely to retain the prominence of the pre-2008 crisis period for quite some time. Overall bank lending growth is still running at a relatively subdued 4% pa, and seems unlikely to lift dramatically in the foreseeable future (the RBA suggested as much in their FSR this week).

Paying 3Y EFP

The 3Y EFP is 10bp wider than the 50bp low reached last week, but has pulled-back 4bp on the move to early rolls today. As explained, our view is that spreads are more likely to widen from this point. We look for the 3Y spread to push towards the August range of 70-75bp.

We pay 3Y EFP at 60bp and target 75bp, with a stop at 53bp.

Figure 6: 1/3Y bond and swap curves


Figure 7: Australian private sector credit


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EU credit views seem likely to remain the biggest driver of swap spreads in the short term.

The historically low outright level of swap rates may encourage more hedging flows and add pay-side pressure to swap spreads.



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Semis after the storm (First published on 27 September) Adam Donaldson Head of Debt Research T. +612 9118 1095 E. [email protected]

QTC paper has tightened against other semi-governments following the Newman Government’s first Budget.

Performance against bond has been aided by the global improvement in credit conditions, including swap spreads.

Both the broader credit back-drop and specific AUD market conditions suggest it’s time to take profit.

We’ve held a generally bullish stance on credit over the past few months, including in high-grade bonds. As detailed on Tuesday, we see a supply/demand imbalance for AUD paper as contributing to further tightening over time.1

This imbalance has been particularly pronounced for bank paper, which has performed strongly this year despite global market gyrations (Figure 1). The trend has been especially pronounced recently following EU policy-makers initiatives to support banks and sovereigns, and the euro. That has leant an additional ‘credit’ component to the rally.

Swap spreads have also tightened accordingly, underpinning strong recent performance of high-grade paper to bond. We recently went long QTC 2018 bonds on the back of the Budget ‘turnaround’ story, but opted to express that view against bond for this reason.2

Re-positioning

That trade has performed very well (Figure 2). But the market tone has clearly soured in recent days. Swap spreads have pushed out again as Europe starts to look more wobbly. But semi-governments have also widened on the back of:

— SAFA’s second downgrade;

— Small benchmark deals by QTC ($750m) and NSWTC ($500m); and

— Widening AUD SSA spreads following Fitch’s downgrade of Council of Europe.

Figure 3 shows how semi-government performance has been assisted by compression of other competing AAA product such as the SSAs and covered bonds. As detailed yesterday, we are cautious that the CoE downgrade is a harbinger of broader pressure on European SSAs.3 This would have more of an impact on the non-AAA semis.

Both the SSA and semi-government markets are trading in an orderly fashion today, with some buying interest re-emerging. We anticipate bank balance sheets will move to pick-up semis again if spreads remain wider

Figure 1: Banks CDS & AUD cash bonds vs swap spread

Source: CBASpectrum

Figure 2: QTC 2018 spreads

Source: CBASpectrum, Bloomberg

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once the new financial year kicks off next week.

We continue to expect QTC paper to perform, and narrow against the AAAs and swap over time. We think the new Government’s Budget paves the way for an eventual return to AAA (and were very surprised Fitch opted for another downgrade). However, they are clearly more influenced by trends in global credit markets, which we think are now under some widening pressure following the big rally. SAFA’s second downgrade probably won’t help. We’ll detail our full views on swap spreads shortly. But we think swap will widen further in line with credit, with paying pressure due to low outright levels an added influence (3yr AUD swap is threatening to make a new record low today).

We move to exit our long QTC 2018 bond position at 107bp (8bp profit). We will look to re-enter versus swap or a AAA semi at some point soon if spreads widen. We also think QTC and other semi-governments will out-perform European SSAs from here, but have expressed that view relative to IBRD instead.

We continue to hold our QTC Nov 2014 position against NSWTC July 2014s, looking for spread compression as they roll-down the curve. We also continue to hold TCV 2020s against NSWTC 2020s on the view that it will be more resilient if economic conditions continue to deteriorate.

Figure 3: Mid-curve HG spreads have compressed sharply

Source: CBASpectrum

Figure 4: Queensland net financial liabilities/operating revenue

Source: Qld Budgets, S&P, CBA

----------------------------------------------------

1 Aussie Debt Strategy: Australian bonds getting scarcer in 2012-13 and beyond, 25-Sep-12

2 Aussie Debt Strategy: Semi-governments after the resources boom, 7-Sep-12

3 CBA Credit Strategy: Buy IBRD 6% 11/16 and Sell EIB 6.125% 01/17 @ -58bps, 26-Sep-12

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WBCC (06-Feb-17)EIB Supra (23-Jan-17)KFW (28-Mar-17)QTC Semi (21-Feb-18)WATC Semi (15-Jul-17)NSWTC Semi (20-Feb-17)NSWTCG Semi (01-Mar-17)

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We take profit on our QTC 2018 trade, but hold the QTC 2014 position and TCV 2020 positions against NSWTC



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RBA Board Meeting – October 2012

Michael Blythe – Chief Economist – 61 2 9118 1101 – [email protected]

The RBA cut the cash rate to 3¼% at the October Board meeting.

The one-two theme in recent rates decisions means a November cut is likely, especially if the QIII CPI is well behaved.

The capex boom may peak earlier than thought and so the non-mining economy needs to pick up the load sooner.

Another 25bpt cut in November would put the cash rate at 3%, matching 2009 lows and well into stimulatory territory.

The cash rate, at 3¼%, is comfortably into stimulatory territory on our calculations…

…although Australian policy rates remain at the upper end of the range on a global comparison.

The black and white reality of the rate-cut decision probably conceals the shades of grey in the debate around the RBA Board table today.

The issues that were causing some concern for policy makers early in September and formed the rationale for today’s decision were: a somewhat more pronounced China slowdown; sharp falls in bulk commodity prices; a fear that expectations for a Eurozone policy fix would be disappointed; and the possibility that the high AUD was weighing more heavily on the economy than previously thought.

Over the intervening period, however, there have been signs of stabilisation in China, commodity prices have bounced (iron ore prices up 20% from the early September lows) and the ECB met expectations. The Fed has added a further element to its QE program. But the pain for some sectors from a high Aussie dollar continues.

Nevertheless the RBA has downplayed some of these reversals and balanced these positive offsets against a global backdrop that, as today’s Statement puts it, means the growth outlook now “looked a little weaker”.

The most significant “new” development was the comment in today’s Statement that “the peak in resource investment is likely to occur next year”. The RBA had previously characterized the peak as in the next year or two. There is also a suggestion that the capex peak may be “lower” than previously thought. If so, the non-mining part of the economy will need to do more of the heavy lifting sooner. Lower interest rates should help facilitate that transition.

So the risks beyond today still lie with lower rates. There is also a one-two theme in recent decisions designed in part to reinforce the positive momentum generated by the initial rates move. So the November meeting is “live”, particularly if the QIII CPI due 24 October) is benign and if the impact of the carbon tax (which took effect in QIII) is muted.

We have added a further 25bpt rate cut into the policy trajectory for November. This cut would

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The cash rate path remains at the higher end of the range relative to the typical easing trajectory although this rate cut cycle started from a lower level than normal.

RBA commentary behind today’s cut and a tendency to favour rate changes after CPI releases indicates that the November meeting is “live”.

put the cash rate at 3%, matching the lows reached in 2009 and well into stimulatory territory on the usual metrics.

There are a number of “structural” issues that, we think, make the RBA reluctant rate cutters beyond that point. The “cycle” will always win when it comes to deciding to shift the policy levers or not. But these structural issues should not be ignored. The recent RBA Financial Stability Review, for example, argued that high household indebtedness means a continuation of household borrowing restraint is desirable. This sentiment sits at odds with ongoing rate cuts. As does earlier comments by RBA Governor Stevens that he was also required to look after the interests of savers. Stevens has also argued that monetary policy cannot make structural adjustment pressures (ie a high AUD) go away.

Beyond the rates decision, the RBA is clearly still concerned about European developments. Implicit in RBA warnings about “high” expectations is a warning about a gap between policy announcement and implementation. Aussie dollar commentary was also a little more muted in today’s Statement – perhaps a reflection that a small rate cut won’t undermine the AUD’s resilience.

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Key Views

United States

Tactical (<1 mth)

Strategic (>3 mths)

Momentum in the US economy has slowed. Q2 GDP growth was just 1.3% (annualised), down from 2.0% in Q1. Payrolls growth has disappointed and the unemployment rate remains too high at 8.1%. The Fed has announced an extension of its funds rate guidance to 2015, US$40bn of MBS purchases per month and indicated additional asset purchases if required (contingent on labour market conditions). With the “Fiscal Cliff” approaching, we look for bonds to remain well supported.

The ECB has announced a new bond purchase plan, designed to lower yields in peripheral bond markets and reduce the “convertibility” risk premium. Political and legal risks remain, as Governments are reticent to seek help given conditions to access EU funds and ECB support. Longer term fiscal and structural issues continue to point to sustained low core bond yields.

Our medium-term USD indicator (the US-G10 two-year swap spread) suggests we should see some modest USD strength over the coming month. We anticipate the recent 17 September 1.3172 high in EUR/USD will fade back to 1.25 before recommencing a push higher. Eurozone economic data remains weak; the recession is yet to bottom. The JPY is likely to remain firm while global uncertainty remains high and real yield differentials remain JPY positive. The risk of FX intervention from the BoJ should prevent USD/JPY from trading down to the lows seen in early 2011 near 76.00.

Policy rate 0.1% 0.1%

10yr bond 1.5% 1.4%

2/10 curve 125bp 115bp

USD/JPY 77.50 78.00

EUR/USD 1.2500 1.2700

Australia

Tactical (<1 mth)

Strategic (>3 mths)

The RBA cut the cash rate again today as expected, acknowledging that soft global growth, declining commodity price/terms of trade and the high AUD make it “appropriate for the stance of monetary policy to be a little more accommodative.” We think there is plenty more easing to come over time, but that language continues to suggest the RBA will take a reactive rather than proactive approach.

The end of the commodity price and associated capex boom means more will probably have to be done to stimulate domestic demand. Strength in the AUD against this backdrop is inherently disinflationary – we look for rates to remain low for an extended period as the Australian economy navigates this difficult path. While there may be some ‘buy the rumour, sell the fact’ profit-taking following in the near-term, we continue to look for Australian bond yields to fall further as the AUS-US 10Y spread moves closer toward 100bp.

Sustained demand for Australia’s high-yielding AAA rated sovereign bonds and reserve currency status should maintain a strong support for the AUD. While a lower terms of trade will squeeze income growth, the net impact on the economy and the RBA’s cash rate will not be enough to offset the capital demand for the AUD. Recent guidance by the Fed and policy stimulus by the ECB suggests little AUD downside against these majors. With the risk of RBA rate cuts heavily priced into the market, it is helpful to consider the RBNZ’s cash rate; despite it being significantly lower than the RBA’s, has not dampened the NZD.


10yr bond 2.9% 2.7%


10yr EFP 80bp 90bp

10yr v US 130bp 120bp

AUD/USD 1.0350 1.05000

New Zealand

Tactical (<1 mth)

Strategic (>3 mths)

The RBNZ continues to keep the OCR at a historically low 2.5%. The RBNZ recently revised down its NZ growth outlook to factor in weaker export incomes and tighter fiscal policy than earlier forecasts. The risk of a rate cut largely emanates from softer global conditions. NZ rates are likely to remain low and the curve is likely to flatten, reflecting low global bond yields. Our economics team doesn’t expect a rate hike until Q2 2013. The 90-day rate guidance in the latest MPS suggests there could be no lift in the OCR until Q4 2013.

Like AUD, we expect NZD to be supported by the recent Fed announcement, but lingering question marks over the Chinese and broader global growth outlook could cap significant gains. However, over the year ahead we think an improving global economic outlook, driven by Asia, should support New Zealand-specific commodity prices. These developments, coupled with ongoing reinsurance inflows related to the Christchurch earthquake should support the NZD. AUD/NZD is typically very sensitive to interest rate differentials between Australia and New Zealand. We expect the cross rate to remain low over coming months.


10yr bond 3.3% 3.2%


10yr v US 170bp 180bp

10yr v AU 60bp 70bp

NZD/USD 0.8210 0.8300

AUD/NZD 1.2440 1.2650 \\\



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Cash Rate Pricing

Source: All data sourced from Bloomberg. Rates displayed are calculated using IB Futures (Australia), FF Futures (US) and OIS in all other currencies.

Australian Cash Rate Pricing New Zealand OCR Pricing US Fed Funds PricingCum. % chance Cum. % chance Cum. % chance

Rate of +25bp Rate of +25bp Rate of +25bpCurrent 3.25 0 Current 2.50 0 Current 0.16 06-Nov-12 3.07 -172 13-Sep-12 2.50 0 1-Aug-12 0.16 -14-Dec-12 2.89 -244 25-Oct-12 2.48 -8 13-Sep-12 0.16 -15-Feb-13 2.71 -317 6-Dec-12 2.42 -30 24-Oct-12 0.14 -85-Mar-13 2.57 -373 31-Jan-13 2.38 -50 11-Dec-12 0.13 -142-Apr-13 2.58 -370 14-Mar-13 2.34 -63 30-Jan-13 0.13 -147-May-13 2.46 -417 24-Apr-13 2.34 -65 20-Mar-13 0.11 -194-Jun-13 2.41 -434 13-Jun-13 2.33 -67 1-May-13 0.12 -162-Jul-13 2.39 -443 19-Jun-13 0.12 -166-Aug-13 2.39 -444 31-Jul-13 0.13 -14

Canadian Rate Pricing EUR EONIA Pricing UK SONIA PricingCum. % chance Cum. % chance Cum. % chance

Rate of +25bp Rate of +25bp Rate of +25bpCurrent 0.95 0 Current 0.02 Current 0.41 05-Jun-12 0.95 0 4-Oct-12 0.09 29 4-Oct-12 0.41 017-Jul-12 0.95 0 8-Nov-12 0.10 32 8-Nov-12 0.38 -95-Sep-12 0.95 0 6-Dec-12 0.06 18 6-Dec-12 0.35 -2123-Oct-12 1.02 29 10-Jan-13 0.05 13 10-Jan-13 0.34 -254-Dec-12 0.98 11 7-Feb-13 0.06 18 7-Feb-13 0.32 -366-Sep-13 1.06 11 7-Mar-13 0.05 12 27-Jan-12 0.43 10

4-Apr-13 0.05 12 15-May-13 0.30 -407-Feb-13 0.06 18 15-May-13 0.30 -40

7-Mar-13 0.05 12 8-Jun-13 0.28 -50

0.00

1.00

2.00

3.00

4.00

Oct Dec Feb Apr Jun Aug Oct

AUD Implied Cash Rate

1.50

1.70

1.90

2.10

2.30

2.50

2.70


NZD Implied Cash Rate

0.00

0.05

0.10

0.15

0.20


USD Implied Cash Rate

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Oct Dec Feb Apr

CAD Implied Cash Rate

0.00

0.20

0.40

0.60

0.80

1.00


GBP Implied Cash Rate

0.00

0.05

0.10

0.15

0.20


EUR Implied Cash Rate



12

CBA Forecasts:

Cash rate 2-Oct Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14US 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25Australia 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25New Zealand 2.50 2.50 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.00United Kingdom 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.25Euro-zone 0.75 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.25Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10Canada 1.00 1.00 1.00 1.25 1.50 1.75 1.75 2.00 2.00 2.002-yr bond yield 2-Oct Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14US 0.23 0.25 0.30 0.30 0.30 0.35 0.40 0.50 0.70 0.90Australia 2.47 2.40 2.30 2.30 2.50 2.60 2.70 2.90 3.00 3.10New Zealand 2.58 2.30 2.30 2.40 2.70 3.20 3.40 3.60 3.70 3.70United Kingdom 0.20 0.10 0.10 0.20 0.30 0.50 0.90 1.30 1.50 1.70Germany 0.05 0.00 0.10 0.20 0.20 0.30 0.70 1.00 1.25 1.50Japan 0.10 0.10 0.15 0.15 0.20 0.20 0.20 0.25 0.30 0.35Canada 1.06 1.00 1.10 1.30 1.50 1.80 2.10 2.20 2.20 2.2010-yr bond yield 2-Oct Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14US 1.62 1.40 1.40 1.40 1.60 1.80 2.00 2.25 2.50 2.75Australia 2.99 2.70 2.50 2.50 2.70 2.90 3.00 3.20 3.40 3.60New Zealand 3.44 3.40 3.30 3.30 3.40 3.70 4.00 4.20 4.20 4.20United Kingdom 1.74 1.40 1.40 1.50 1.60 1.80 2.00 2.20 2.40 2.50Germany 1.45 1.20 1.10 1.20 1.40 1.60 1.80 1.90 2.00 2.00Japan 0.76 0.80 0.90 0.90 1.00 1.00 1.10 1.10 1.20 1.20Canada 1.71 1.60 1.70 1.80 2.00 2.30 2.50 2.70 2.90 3.00

Currencies 2-Oct Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14AUD/USD 1.03 1.05 1.04 1.04 1.04 1.04 1.04AUD/JPY 80.41 82.95 83.20 84.24 85.28 86.32 87.36AUD/EUR 0.80 0.84 0.82 0.80 0.79 0.79 0.78AUD/GBP 0.64 0.66 0.65 0.64 0.63 0.63 0.63

AUD/CAD 1.01 1.07 1.03 1.03 1.02 1.02 1.03AUD/NZD 1.24 1.27 1.25 1.24 1.27 1.27 1.27USD/JPY 78.06 79.00 80.00 81.00 82.00 83.00 84.00EUR/USD 1.29 1.25 1.27 1.30 1.31 1.32 1.33

GBP/USD 1.62 1.58 1.60 1.62 1.64 1.64 1.64USD/CAD 0.98 1.02 0.99 0.99 0.98 0.98 0.99NZD/USD 0.83 0.83 0.83 0.84 0.82 0.82 0.82



13

Calendar – October 2012

Note: Figures in brackets represent previous result (if available). All information is preliminary and subject to revision. Chief Economist: Michael Blythe ph: 9118-1101 Economist: Diana Mousina: 9118-6394

Monday Tuesday Wednesday Thursday Friday1 2 3 4 5

A U Labo ur D ay (N SW, A C T , SA ) A U A I-Gro up P M I, Sep, Index, (45.3) A U H IA new ho me sales A ug, m%ch, ( -5 .6) A U C B A / A i-Gro up P erf o f Serv Index, Sep, (42.4) JP Leading / Co incident index CI, Aug, (93/93.8)A U R P D ata ho use prices, Sep, m%ch, (0) A U R B A cash rate , %, 3.50, (3.50) A U T rade balance A ug, A $ bn, -0 .7, ( -0 .6) A U B uilding appro vals, A ug, m%ch, 2 .0, ( -17.3) JP BoJ target rate, %, 0-0.10, (0.1)A U T D inf lat gauge Sep, m/ y%ch, (0 .6 / 2 .2) EU PPI, Aug, m/y%ch, (0.4/1.8) A U Engineering C o nstruct io n A ctivity, QII A U R etail t rade, A ug, m%ch, 0.0 , ( -0.8) GE Factory orders, Aug, m/y%ch, (0.5/-4.5)CH PM I M anufacturing, Sep, Index, (49.2) UK PM I construction, Sep, Index, (49) CH Non-M anuf PM I Sep, Index, (56.3) IN Services PM I, Sep US Non-farm payrolls, Sep, '000, (96)IN M anufacturing PM I, Sep US Total vehicle sales, Sep, mn, (14.5) EU PM I services/composite, Sep, Index, (46/45.9) EU ECB Interest Rate Decision, %, 0.50, (0.75) US Unemployment rate, Sep, %, (8.1)JP Tankan Index, QIII, Index, (-1) EU Retail sales, Aug, m/y%ch, (-0.2/-1.8) UK BoE Housing equity withdrawal, QII, £bn, (-8.8) US Consumer credit, Aug, US$bn, (-3.3)JP Vehicle sales, Sep, y%ch, (7.3) GE/UK PM I services, Sep, Index, (50.6/53.7) UK BoE announces rates, %, 0.50, (0.50) CA Unemployment rate, Sep, %, (7.3)EU/GE/UK PM I manufacturing, Sep, Index, (46/47.3/49.5) US ISM non-manufacturing, Sep, Index, (53.7) US Factory orders, Aug, m%ch, (2.8) CA Building permits, Aug, m%ch, (-2.3)UK Net consumer credit, Aug, £bn, (-0.2) US FOM C M inutes US ISM manufacturing, Sep, Index, (49.6)

8 9 10 11 12A U A i-Gro up P C I, Sep, Index, (32.2) A U N A B B us co nf/ co nd, Sep, Index, ( -2/ 1) A U M I/ WB C C o nsumer Sent, Oct, Index, (98.2) A U M I C o nsumer Inf lat io n Expectat , Oct, %, (2.4) CH Trade balance, Sep, US$bn, (26.7) (13 Oct)A U A N Z Jo b ads, Sep, m%ch, ( -2 .3) A U R B A D ep.Go v. Lo we speaks in H o bart JP M achine too l o rders, Sep, y%ch, (-2.7) A U M I C o ns. Unemplo y. Expectat , Oct, Index, (155.3) IN Industrial Production, Aug, y%ch, (0.1)A U R B A Go v. Stevens presents to H o use o f R eps. C o mmittee NZ NZIER Business opinion survey QIII, (-4) US Wholesale inventories, Aug, m%ch, (0.7) A U Labo ur F o rce, Sep JP Domestic CGPI, Sep, y/y%ch, (-1.8/0.3)GE Trade bal, Aug, €bn, (16.9) NZ Credit card spending, Sep, m%ch, (2.4) US Federal Reserve Beige Book emplo yment , '000, 6, ( -8.8) EU Industrial production Aug, m/y%ch, (0.6/-2.3)GE Industrial production, Aug, m/y%ch, (1.3/-1.4) JP Curr a/c to tal/adjusted, Aug, ¥bn, (625.4/335..4) IM F Global Financial Stability Report unemplo yment rate, %, 5.2 , (5 .1) US Producer price index Sep, m/y%ch, (1.7/2)

UK RICS house price balance, Sep, %, (-19) part ic ipat io n rate , %, 65.0 , (65 .0) US Uni. Of M ichigan confidence, OctUK Industrial production, Aug, m/y%ch, (2.9/-0.8) A U R B A H ead o f F inancial Stability Ellis speaks in SydneyUK Total trade balance, Aug, £bn, (-1.5) NZ Food prices, Sep, m%ch, (0.1)CA Housing starts, Sep, '000, (224.9) NZ Business PM I, Sep, Index, (47.2)IM F World Economic Outlook JP M achine orders, Aug, m/y%ch, (4.6/1.7)

EU ECB M onthly report US Trade balance, Aug, US$bn, (-42.0)CA Trade balance Aug, C$bn, (-2.3)

15 16 17 18 19A U M o to r veh. sales, Sep, m/ y%ch, (3 .6 / 6 .4) A U R B A B o ard M inutes, Oct A U C o nstruct io n A ct iv ity, QII A U N A B B usiness Survey, QIII NZ Credit card spending, Sep, m/y%ch, (0.1/1.9)A U H o using F inance, A ug A U Lending F inance, Sep A U B uilding A ctiv ity, QII A U R B A A s.Go v. Edey speaks in Sydney JP Leading / Co incident index, Aug N o . o f o wn-o ccupiers , %, 2, ( -1.0) NZ CPI, QIII, q/y%ch, (0.3/1.0) JP M achine too l o rders, Sep CH Industrial production, Sep, y%ch, (8.9) EU Current account, Aug, €bn, (9.7) Value o f a ll lo ans, %, 2 , ( -1.4) EU CPI, Sep, m%ch, (0.4); Core, y%ch, (1.5) EU Construction output, Aug, m/y%ch, (-0.3/-4.7) CH GDP, QIII, y%ch, (7.6) GE Producer prices, Sep, m/y%ch, (0.5/1.6)NZ PSI, Sep, Index, (50) EU Trade balance Aug, €bn, (7.9) UK Bank of England minutes CH Retail sales, Sep, y%ch, (13.2) US Existing home sales, Sep, mn/m%ch, (4.8/7.8)CH PPI/CPI, Sep, y%ch, (-3.5/2.0) EU/GE ZEW survey (econ. sentiment), Oct, (-3.8/-18.2) UK ILO unemployment rate (3mths), Aug, %, (8.1) IN CPI, Sep, y%ch, (10) CA CPI, Sep, m/y%ch, (0.2/1.2)IN Wholesale prices, Sep, y%ch, (7.6) UK PPI Input/Output/core, Sep, y%ch, (1.4/2.2/1.2) US Housing starts/Building Permits, Sep, '000, (750/803) UK Retail sales, Sep, m/y%ch, (-0.2/2.7)JP Industrial production, Aug UK CPI, Sep, m/y%ch, (0.5/2.5); Core, y%ch, (2.1) US Philadelphia Federal Index, Oct, (-1.9)JP Capacity utilisation, Aug, m%ch, (0.5) US CPI, Sep, m/y%ch, (0.6/1.7); Core, m/y%ch, (0.1/1.9) US Leading indicators, Sep, m%ch, (-0.1)US Empire manufacturing, Oct, Index, (-10.4) US Industrial production, Sep, m%ch, (-1.2) CA Wholesale sales, Aug, m%ch, (-0.6)US Retail sales, Sep, m%ch, (0.9) US Capacity utilisation, Sep, %, (78.2)US Business inventories, Aug, m%ch, (0.8)

22 23 24 25 26A U R B A A s.Go v. D ebelle speaks in Sydney US Richmond Fed, Oct A U D EWR skilled vacancies, Sep, m%ch, (0) NZ RBNZ official cash rate, %, 2.50, (2.50) NZ Trade balance, SepJP Trade bal to tal/adj, Sep, ¥bn, (-754.1/472.8) CA Retail sales, Aug A U C P I, QIII, q/ y%ch UK GDP, QIII, q%ch, (-0.5) JP CPI, Sep

CA Bank o f Canada, %, 1.00, (1.00) H eadline, 1.3 / 1.9 , (0.5/ 1.2) US Durable goods orders, Sep US GDP, QIII R B A Underlying, 0.6/ 2.2 , (0 .6/ 2.0) US Pending home sales, Sep

A U R B A H ead o f F inancial Stability Ellis speaks in Sydney US Initial/Continuing jobless claimsCH HSBC Flash PM I M anufacturing, Oct (47.6)GE IFO - Business climate, OctUS New home sales, Sep, '000, (372)US FOM C rate decision, %, 0-¼, (0.25)CA Bank of Canada M onetary Po licy Report

29 30 31 Central Bank Meetings Early NovemberJP Retail sales, Sep A U H IA new ho me sales, Sep A U B uild appro v, Sep AU RBA (2 October) AU Intl. Trade Prices (1 November)GE CPI, Oct A U R B A D ep.Go v. Lo we speaks at C B A co nference in Sydney A U P rivate secto r credit , Sep UK BOE (4 October) AU PPI (2 November)UK Net consumer credit, Sep IN RBI Interest Rate Decision, (8.0) NZ Building permits, Sep EZ ECB (4 October) AU Annual National Accounts (2 November)US Personal income/spending, Sep JP Industrial/Vehicle production, Sep NZ NBNZ Business confidence, Oct JP BoJ (5 October, 30 October) AU Trade Balance (5 November)US PCE deflator/core, Sep JP BoJ target rate JP Construction orders/Housing starts, Sep CA BOC (23 October) AU Retail Trade (5 November)US Dallas Fed, Oct GE Retail sales, Sep UK GfK consumer confidence survey, Oct US FOM C (24 October) AU RBA Board M eeting (6 November)

US S&P/Case-Shiller home price index, Aug US Employment cost index, QIII, q%ch, (0.5) NZ RBNZ (25 October) AU House Prices (6 November)IN RBI (30 October)



14

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