Market continuing to flirt with rate cuts despite hawkish RBNZ mandate

By Kymberly Martin

NZ swaps closed little changed last week, at familiar levels. The market continues to flirt with a more than 50% chance of a 25bps OCR cut in the year ahead.

While not our central view, as cautionary pricing it does not seem unreasonable. However, if 25-50bps of cuts begin to be priced this would take short-end swap yields toward the lower end of ranges. This would provide paying opportunities.

Generally, we now see NZ swap yields in a fairly wide trading range until well into next year, given the RBNZ is now seen ‘on hold’ until December 2013.

There is not too much on the immediate horizon to shift market pricing. This Thursday’s NBNZ business survey will be the most significant local data release this week. Given some recent loss of momentum in economic indicators we wouldn’t be surprised to see this slip below average readings.

The 2s-10s swap curve now sits around 109bps. In recent weeks, resistance to further flattening has been building just below this level. Whether this level holds this week will likely be contingent on moves in US long yields.

On Friday night US 10-year yields traded in a fairly tight range, given the absence of data releases, closing at 1.75%.

As the post-QEIII euphoria fades, the Eurozone will likely be back in the headlines this week. Over the weekend the Spanish economic minister dampened expectations of an imminent Spanish application for external aid (with associated conditionality).

Expect further headlines this week as the Spanish cabinet is scheduled to approve its 2013 budget. Italy also revisits markets to sell bonds on Thursday night. All up, it looks to be a week that will test global risk appetite that still sits at fairly buoyant levels.