Overnight Index Swap


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Overnight Index Swap

A short-term, plain vanilla swap in which the legs are a fixed interest rate and the current rate for an overnight loan. As with all interest rate swaps, an overnight index swap is calculated over some notional amount.
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Indeed, the RBA raised rates by 25 basis points to 3.25 percent, as the central bank determined that "growth [is] likely to be close to trend over the year ahead [and] inflation close to target," adding that "the risk of serious economic contraction in Australia [has] passed." Meanwhile, RBA Governor Stevens said that "it is now prudent to begin gradually lessening the stimulus provided by monetary policy," suggesting more rate hikes may follow, with Credit Suisse overnight index swaps now pricing in another 175 basis points worth of increases over the next 12 months.
Overnight index swaps jumped to 99bps of rate hikes over the next twelve month from 85 yesterday.
Overnight index swaps from Credit Suisse are pricing in 85.6 bps of hikes over the next 12 months; but this is likely to be come from firming well into next year.
Trading in overnight index swaps suggests traders are pricing the likelihood that the RBA will raise rates by 175-200 basis points over the next 12 months.
Meanwhile, Credit Suisse overnight index swaps are up 187bp this month as the RBA maintains a neutral policy stance, and long-term expectations for higher borrowing costs is likely to drive the aussie-dollar higher as investors speculate the central bank to tighten policy over the next 12 months.
As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in a 60 percent chance of a 25 basis point rate hike during this upcoming meeting - which we think to be highly unlikely - and 175 basis points worth of hikes over the next 12 months, which is generally in line with what we've seen since early August.
The pair continues to see little relationship with interest rate expectations with overnight index swaps holding only a 0.1 correlation with price direction.EUR/USD The EURUSD continues to see its correlation to risk hold firm as equity markets are currently explaining 47% of price action.
As it stands, Credit Suisse overnight index swaps are pricing in a 126 basis points worth of hikes by the Reserve Bank of New Zealand over the next 12 months - the most since at least 2006 - but if New Zealand GDP falls more than expected, expectations could reverse and weigh on the New Zealand dollar.
At their peak, Overnight Index Swaps were pricing in an approximate 50 percent chance that the Reserve Bank would raise interest rates as soon as October.
At the same time, Credit Suisse overnight index swaps are up nearly 90bp in September as investors anticipate the BoE to tighten policy over the next 12 months, and increased speculation for a rate hike in the first half of 2010 may lead the GBP/USD to retrace the decline from the previous month over the near-term.
Credit Suisse overnight index swaps a 2% chance for a rate hike tomorrow, while investors anticipate the BoE to raise borrowing costs by more than 75bp over the next 12 months as the outlook
We also saw in the last policy statement that the RBNZ maintained that it was "appropriate to continue to provide substantial monetary policy stimulus to the economy" and that the central bank could still lower rates "modestly" during the coming quarters as they "continue to expect to keep the OCR at or below the current level through until the latter part of 2010." If the RBNZ eliminates the phrase noting that they could still lower rates, the New Zealand dollar is likely to surge in anticipation of rate hikes down the line, as Credit Suisse overnight index swaps are currently pricing in 100 basis points in increases over the next 12 months.