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A lower currency may mean higher prices and a higher OCR track. Interest rate markets yet to adjust to new realities

Bonds
A lower currency may mean higher prices and a higher OCR track. Interest rate markets yet to adjust to new realities

By Kymberly Martin

NZ swaps closed up 1-2 bps yesterday.

Overnight, US 10-year yields declined from 2.53% to 2.48%.

While the RBNZ’s fx data release elicited a sharp plunge in the NZD, the response in rates markets was limited.

However, now there is hard evidence the RBNZ is assisting the currency lower (in addition to its recent jaw-boning), it may not be long before the market begins to re-consider the RBNZ’s OCR track i.e. i.e. all else equal, a lower NZ TWI, suggests a higher OCR track.

The TWI (75.9) is now close to levels the RBNZ had projected for 4Q 2015. The market currently under-prices the OCR track published in the RBNZ’s September MPS. This implied the OCR gets to at least 4.50% by late 2016.

That said, it will take a lot to get NZ 2-year swap to break out of the tight 12 bps range it has traded for the past couple of months. Receivers will likely be waiting above 4.10%. Yesterday, 2 and 5-year swap closed at 4.06% and 4.35% respectively. The yield on NZGB23s sits little changed at 4.13%.

Overnight, Eurozone equities declined while German bonds rallied, despite EU economic and consumer confidence readings that were aligned with expectations.

Market sentiment was subdued by news of Hong Kong protests. US Treasury yields also declined.

Data also showed the US Fed’s preferred inflation measure (PCE deflator) contained at 1.5%. The yield on US 10-year bonds declined from 2.53% to 2.48%. Aussie bond future prices have also risen. Expect this to exert downward pressure on NZ longer-dated yields at the open.

Today, the domestic focus will be the release of the ANZ business confidence survey.

 
 
 
 
 
 
 
 

Daily swap rates

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Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA

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