Cyprus deal raises issues regarding the lack of sanctity of bank deposits and potential prolonged use of capital controls

By Kymberly Martin

NZ swaps closed down 2-4bps across the curve yesterday. In the absence of a specific domestic catalyst, the slightly more sober global backdrop weighed on the curve.

The broader trend in swaps is a consolidation of the slightly higher ranges, established since the start of the year. For example, 2-year swap (2.91% currently) appears to now be trading in a 2.78-3.10% range (2.50-2.90% previously).

We believe it would take a significant negative shock to test the bottom of this new range. The market would need to again start pricing OCR cuts.

We see the broader trend going forward being one of higher lows and higher highs on yield, as the market moves toward a first OCR hike in March 2014. The market currently prices around a 50% chance of a hike by that time.

Today’s ANZ business survey will be important for informing opinion on the strength of the domestic economy.

Overnight, US 10-year yields continued to trade in their holding pattern, sitting at 1.91% this morning. German bonds stabilised and peripheral European spreads narrowed slightly.

ECB member Coeure echoed Draghi’s previous, now immortalised, comment that it would “do whatever it takes” to preserve the EUR.

However, despite a deal for Cyprus, markets remains nervous about the broader message it sends.

It raises issues regarding the lack of sanctity of bank deposits in Eurozone as a whole, and the potential prolonged use of capital controls.

Tonight, Italy will once again return to markets to auction sovereign bonds. In addition EU consumer confidence will be released along with US pending home sales data.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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