This trade idea should be considered as the second “layer” of our short Australian credit (and credibility) thesis, following from the multi-currency short idea of the last edition. Broadly, this thesis is one of complacency over the medium term, as the economic reality of a sharply falling terms of trade has not been priced in by markets or politicians. This is reflected in falling sovereign credit default swap (CDS) prices, still at very cheap levels, and also against the four major banks (Commonwealth, ANZ, NAB and Westpac) which have moved in lockstep.
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