By Kymberly Martin
It was a relatively quiet day ahead of today’s RBNZ meeting. NZ swap yields closed up 1-3bps.
As 2-year swap closed at 3.84% yesterday the curve reversed its recent flattening bias. The 2-10s swap curve steepened to 125bps.
NZ bonds also closed up 2-3bps. The yields on NZ 10-year bonds now sit at 4.60%. Spreads to US and AU equivalents sit at 189bps and 58bps respectively.
US10-year yields have traded down from 2.78% to just above 2.71%.
The Fed is widely expected to announce an additional US$10b of ‘tapering’ this morning (8am NZT). The market will likely focus its attention on any adjustments to the Fed’s ‘forward guidance’.
Approaching this morning’s RBNZ decision (9am NZT), the market still prices around a 35% chance of an RBNZ hike.
While we believe a hike today would be entirely justified based on fundamentals, we do not expect the RBNZ to deliver a hike.
Rather, we expect it to remain ‘on hold’ consistent with previous rhetoric, but prepare the market for a 25bps rate hike as early as March.
We continue to see 125bps of rate hikes in the year ahead.
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