BNZ says it is hard to see short end swaps falling further; US yields volatile on surprise lower, then higher data; local eyes today on business confidence survey

By Kymberly Martin

NZ swaps closed down 2-3 bps across the curve yesterday.

Overnight, US 10-year yields traded choppily but sit a little higher at 2.29% this morning.

There appears to still be plenty of offshore receiving interest in the short-end of the NZ curve ahead of Thursday’s RBNZ meeting. Clearly the market is positioning for a more dovish OCR review.

2-year swap closed down 2 bps, at 3.90%. Given apparent positioning, it is difficult to see swaps declining much more on the RBNZ meeting, unless the Bank moves to an outright ‘neutral’ stance. This is not our central view, though the Bank will be compelled to acknowledge that inflation continues to undershoot expectation.

Rather than concentrating on the short-end, our preferred hedging strategy remains to move out the curve, to take advantage of its current flatness. The 2-10s curve closed at 51 bps.

Overnight, US 10-year yields dropped sharply after the release of disappointing Sept US durable goods orders.  Yields later rebounded on the back of upside surprises from US consumer confidence and the Richmond Fed Manufacturing index. From lows of 2.25% last evening, yields now trade around 2.29%.

Today, the ANZ business confidence survey will be released. We’ll be watching the inflation and confidence indicators.

Early tomorrow morning, the US Fed will meet. It is expected to complete its asset purchases, but the focus will be on whether it removes the “considerable time” phrase from its statement. i.e. to described the time between the end of QE and the start of rate hikes.