A lower currency may convince markets OCR rate hikes are back on track; US and UK central banks turn hawkish

By Kymberly Martin

NZ swaps closed up 3-4 bps while NZGB yields closed up 6-8 bps yesterday.

Overnight, US 10-year yields have popped higher after the release of US Fed Minutes.

NZ swaps pushed up across the curve yesterday. 2 and 5-year closed at 4.06% and 4.39% respectively. There seems reluctance for 2-year to break below 4%.

The fact the NZD/USD is threatening to break below 0.8400, may be contributing to sentiment. A lower currency would remove one of the key impediments (in the market’s mind) to restarting the OCR hiking process at year-end. It is interesting to note the NZ TWI (79.00) is now close to the RBNZ’s Q4 average forecast. This may start to resonate now the market is pricing only a 20% chance of an OCR hike by year-end and 35 bps by a year’s time.

NZGBs also experienced a sell-off yesterday. The yield on the 2017 maturity closed up 6 bps while that on the 2027 closed up 8 bps. The yield on NZGB23s now sits at 4.21%. NZGB23s underperformed against both their AU and US counterparts with spreads now at 87 bps and 195 bps respectively.

In Central Banks minutes overnight, the Bank of England’s showed that two of the nine members dissented in favour of rate hikes this month. This is a hawkish signal in that the Bank is inching ever closer to its first rate hike. The market has this priced for early next year. UK gilt yield gapped higher on the release but later gave up their gains. UK 10-year yields remain at 2.42%.

Overnight, the slightly more hawkish tone of the US Fed Minutes saw US 10-year yields immediately pop from 2.41% to 2.44%.

Today, the ANZ Consumer Confidence survey will be released. The HSBC China PMI release will be a focus today. Tonight, Eurozone and US PMI data will be released along with the US Philadelphia Fed survey.