In recent days, the front-end market has seen notable shifts, particularly around receivers in front meetings and the mixed flow further out. The focus of many traders, including the desk, has been on the potential for a 50 basis point (bp) rate cut in October, a key event on the horizon. While there is consensus building around this possibility, there remains some uncertainty over how October and November will unfold following such a move.

50bp Rate Cut: What’s Next for October/November?

The desk’s current outlook gravitates towards a 50bp cut in October, but what happens next remains unclear. One scenario suggests that a 50bp cut could push rates further down, to the 55-60bp range. This is largely due to the three-month gap between the October and November meetings, which could lure some risk-reward receiving, creating pressure on rates.

Positioning for February: A Strategic Play

In the meantime, the desk continues to favor paying February on the fly. With the possibility that rate cuts could be front-loaded this year, February is becoming an attractive target. This strategy aligns with the view that earlier cuts will likely reduce the OIS premium for that month, providing an edge for those positioned accordingly.

Volatile Funding and Repo Movements

This week has also seen volatility in funding markets, with notable swings between sessions. At the same time, the month-end turn collapsed to 65bp under during Asian trading hours, despite repo rates hovering 8-10bp over OIS. This divergence reflects the broader uncertainty in funding conditions, which could continue to whipsaw as we move further into Q4.

One intriguing development was the Reserve Bank of New Zealand (RBNZ) offering Open Market Operations (OMO) on Friday morning, up to NZD 1 billion, at a rate one basis point above cash. This signals some tightening in short-term liquidity and suggests that central banks are actively managing liquidity conditions amidst ongoing market fluctuations.

FX-OIS and Cross-Currency Basis Moves

On the FX-OIS front, marginal tightening was observed at the start of the week, with the 1-month tenor moving from 15bp to 13bp under OIS. The desk also noticed some profit-taking in 1y1y and 2y1y cross-currency basis receives, as market participants adjusted their positions.

Looking ahead, it will be interesting to see whether banks take the opportunity to get ahead of issuance. With NZD 14-15 billion in pandemic-related funding set to roll off from the Funding for Lending Programme (FLP) between now and the end of 2025, there may be increased activity in this space as banks manage their refinancing needs.

The front-end market is at a crossroads, with a potential 50bp rate cut looming in October and key movements in funding and FX-OIS markets unfolding. The desk remains focused on positioning ahead of February and closely monitoring developments in cross-currency basis and repo markets. As always, the challenge lies in navigating the volatility and making informed decisions as more data emerges in the coming weeks.