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Aussie data moves Kiwi rates, RBA rate cut closer; NZ-AU swap spreads widen

Posted in Bonds

By Kymberly Martin

NZ swaps closed down 3-5bps yesterday in sympathy with the AU move. Overnight, US 10-year yields slipped back toward 2.84%.

NZ 2 and 5-year swap closed at 3.79% and 4.59% respectively. With less than two weeks now until the end-January RBNZ meeting the market still prices around a 30% chance of a hike at the meeting, and around 175bps of hikes in the coming two years. By contrast we expect a first hike in March but at least 200bps of hikes in the coming two years.

But yesterday’s shift down in NZ yields was less to do with domestic developments and more to do with moves across the Tasman.

On the back of the weak AU employment report yesterday AU swaps fell sharply. For example, AU 2-year swap fell 10bps to 2.84%. The market now prices slightly more than a 50% chance of an RBA rate cut by Q3 this year. We maintain our view the AU unemployment rate will rise over 6% in coming months, putting pressure on the RBA to cut again by mid-year.

Yesterday, NZ-AU 2-year swap spreads pushed up to 101bps, their highest level since late 2008. We see spreads peaking around 140bps mid this year.

Yesterday, NZ bond yields closed down 1-5bps with a notable flattening of the curve. Data yesterday showed that foreign holdings of NZGBs remained steady in December at 65.1%, though down from a peak of 69.1% in May last year.

Overnight, US benchmark 10-year yields trundled sideways around 2.88% before dipping to 2.84% early this morning. Early this morning core US CPI data came in line with expectation at 1.5%y/y. In comments overnight Fed chairman Bernanke defended the policy of QE saying it had assisted the economy without posing inflation risk. Although the Fed remains “extraordinarily sensitive” to the prospect of financial market instability, he did not think that was a concern at this point.

Today, there is little on the data agenda on either side of the Tasman. Tonight, UK retail sales data will be released along with US industrial production, December housing starts and the University of Michigan Confidence survey.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Short term swap rates have

Short term swap rates have risen too dramatically recently, I think it's only right they're starting to self correct a bit.
It's hard to see how the opimism about the world economy can be sustained: the raw capitalist model sems to have broken, and nothing substantially has been done to fix it. No new economic models have been proposed.
Economies based on pure consumerism are not the way of the future, even taking into account the emerging markets of China and India.
Really not sure how much the OCR will rise this year. I think it may go up by 50bps, but this will put a great deal of pressure on the exchange rate. Then again - this will make the importing of building materials cheaper,so it might offset the losses from our exporting industries.
Lots of variables, too hard to predict. Civil unrest due to growing inequality is one factor that will need to be taken into account (worldwide, not in NZ). And more weater extremes. As I said - too many variables.
We live in interesting times, indeed.