By Kymberly Martin
NZ yields closed little changed yesterday. 2-year swap closed at 2.82% with a slight further steepening of the curve.
The 2-10s curve now sits at 99bps. We expect further steepening within the well-established 95-125bps trading range.
AU short-end swaps closed down around 6bps after the RBA delivered a 25bsp cut, leaving the door open for further cuts.
It stated; ‘The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand.
At today’s meeting the Board decided to use some of that scope.’ Our NAB colleagues continue to expect another cut late in the year after the RBA has had more time to assess the impact of cuts to date. The market also continues to price further cuts.
The NZ-AU 2-year swap spread has widened to 10bps. We expect this spread to widen further, approaching 40bps by year-end.
By that time we see RBA and RBNZ cash rates at the same level, but the RBNZ approaching a gradual tightening cycle.
Overnight, ‘safe haven’ US and German 10-year bonds continued their sell-off. Yields rose respectively from 1.75% to 1.78% and from 1.24% to 1.30%.
Expect further steepening of the NZ curve today. The RBA’s cut should keep the NZ short-end anchored while the continued rise in US long yields exerts upward pressure on the long-end.
Today’s RBNZ Financial Stability Report may gain more attention than its usual passing nod, given some likely discussion of proposed new macro-prudential tools.
The market may misinterpret their potential use as providing less need for the RBNZ to use its core monetary policy tool, the OCR.
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