Forecasts for interest rate reductions by the Reserve Bank of Australia increased following the announcement of Trump’s tariff trade war. ANZ anticipates a cut of 25 basis points at the upcoming meeting in May, with additional cuts expected in July and August.
The current cash rate stands at 4.1%, having been decreased from 4.35% in February. If three further 25 basis point cuts occur, the cash rate would decrease to 3.35%.
Monetary easing in response to trade tensions
Such a sequence of policy easing, led by the Reserve Bank’s anticipated decisions, places fresh emphasis on how rates may shift the direction of medium-term positioning. The initial response from ANZ reflects a firm conviction that the central bank will react decisively to external economic shocks connected to the renewed trade tariffs from the United States, a move orchestrated by Trump that risks further disrupting global supply chains. With tariffs potentially dampening business confidence and trade activity, local policymakers are likely to lean more heavily on monetary tools.
The latest adjustment to the cash rate—already lowered from 4.35% to 4.1%—was their first sign of returning to a more accommodative stance. Should a further trio of 25 basis point reductions materialise across May, July, and August, we would be looking at a monetary setting down at 3.35%, a level last seen during the initial stages of post-pandemic normalisation. While that may appear abrupt after a long sequence of hikes, it matches the urgency arising from tightened trade conditions.
Lowe’s team would not be expected to act blindly, but rather respond to weaker inflation forecasts and softening domestic demand. Short-term swaps have already begun to reflect these expectations, with implied yields pricing in declining forward guidance. This is something we, as traders watching momentum build or ebb out of macro trends, cannot afford to ignore. Volatility in rates could become more pronounced near scheduled announcements, compressing premium or widening skews in options markets tied to rate futures.
Shifting curve strategies and market positioning
What Westpac hinted at last week—though with less conviction—has now become more visible in yield compression across the front end of the curve. If this narrative builds over the next fortnight, we may see further unwinds of flattened curve positions. To prepare, compression trades between the 2Y and 5Y looks increasingly less favourable, especially if the RBA follows through on these moves in consecutive steps. Some may pivot to targeting steeper structures on the longer end of the curve if the easing bias extends into calendar Q3.
Options flows suggest uncertain timing rather than direction. Implied vol in shorter expiries has picked up, particularly around June tenor exposures. Positioning ourselves around rate-sensitive announcements will likely drive more opportunity than chasing broader sentiment. Butterfly spreads and straddle buyers may well find benefit from wide price swings, particularly if pricing shifts drift in the lead-up to each RBA decision.
From our perspective, adopting a flexible posture using asymmetrical strategies—not merely directional bets—will allow for responsiveness without betting on unrealistic outcomes. Market conviction on the downside is still modest compared with other global central banks. If the RBA indeed returns to a prolonged easing phase, we may find current risk-reward ratios for digital options or capped structures less attractive than previously thought.
We keep a close eye on external pricing pressures, too. Commodity-linked inflation—especially in energy—is beginning to diverge from headline readings. If that continues, the RBA has a tighter path to navigate than standard models suggest. That, in turn, gets reflected in swaption skew over the 3- to 6-month horizon, which is precisely where we see the most fluid movement.
In this environment, it’s less about targeting the base cash rate level and more about tracking its expected path across the rest of the year. That forward curve movement shapes value, not the headline cut. Traders positioning now should lean into timing mismatches rather than directional conviction alone.
