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RBA announcement too close to call; RBA cut would see dip in AU and NZ short rates; swathe of PMI data delivers on right side of ledger

Bonds
RBA announcement too close to call; RBA cut would see dip in AU and NZ short rates; swathe of PMI data delivers on right side of ledger

By Kymberly Martin

It was a relatively quiet start to the week.NZ swap and bond yields closed up 1-2bps.

Overnight, US 10-year yields have traded up to around 1.86% currently.

NZ 2 and 10-year swap closed only marginally higher, at 2.27% and 2.99% respectively yesterday, with the 2-10s curve at 72bps.

We would continue to look for a move down below 65bps (lower end of range of past year) to position for curve steepening to above 100bps.

Ahead of today’s RBA meeting, the market assigns around a 50% probability to a cut. The market ultimately sees the RBA’s cash rate being cut to 1.63% within the year ahead, from its current level of 2.0%.

Our NAB colleagues believe last week’s low-side CPI reading offers the RBA the opportunity cut this week, though it is a close call.

If the Bank does cut, a dip in AU short-end rates will likely be mimicked by NZ equivalents (in direction, if not magnitude). The market will more seriously consider the prospect of a June RBNZ cut. Currently the market prices this probability at around 56%.

Overnight, a swathe of manufacturing PMI releases all delivered on the right side of 50 i.e. remained in expansion mode. This appeared to give a boost to US yields, where 10-year traded up to early morning highs around 1.86%.

Today’s focus will be the RBA’s meeting and the delivery of the AU Federal Budget. There are a couple of non-voting US FOMC speakers scheduled overnight, though they are unlikely to be market moving.

Also keep an eye out for the latest GDT dairy auction in the early hours of tomorrow morning, which may influence sentiment toward NZ rates at tomorrow morning’s open.

Daily swap rates

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Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Kymberly Martin is on the BNZ Research team. All its research is available here.

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