Current elevated level of NZ TWI may impact near-term pace of RBNZ rate hikes but unlikely to affect medium term trajectory for OCR

By Kymberly Martin

NZ yields closed up 1-2bps in quiet markets yesterday. Overnight, US 10-year yields slipped to 2.59%.

NZ 2-year and 5-year swap closed at 4.00% and 5.00% respectively. We continue to see hedging value at these levels, particularly in 2-4-year rates.

We accept that the near-term pace of RBNZ rate hikes could be slowed by the current elevated level of the NZ TWI. However, we do not see this impacting on the medium-term trajectory for the OCR. We see it reaching 5.0% by the end of next year i.e. a further 200bps of hikes. The market prices only 125bps of hikes by this time.

Yesterday, the RBA left the cash rate at 2.50%, maintaining a neutral bias. It is comfortably on hold, ready to sit back and see how the economy plays out in coming months. The market prices a first 25bps rate hike by around September next year. However, the AU market is likely in a similar phase to that which NZ has just exited. i.e where the cash rate is ‘on hold’ at low levels for a protracted period but market expectations oscillate, providing trading opportunities.

While equity markets were fairly subdued overnight, US 10-year yields rose as high as 2.62%, before falling back to 2.59%. They remain at the bottom of year-to-date ranges. In the early hours of tomorrow morning (NZT) Fed Chair, Yellen, is scheduled to testify to the Joint Economic Committee. However, it is difficult to envisage she will say anything to jolt yields out of their current slump.

Domestically today, the NZ labour market reports will be released. We are looking for a solid 0.6% gain in Q1 employment (3.4%y/y). However, yet another strong data point is unlikely to push short-end NZ yields notably higher, given the level of the NZD. In addition, the long-end of the NZ curve will continue to be mostly beholden to moves in offshore (US, AU) yields.