NZ swaps sitting close to fair value; expect 'robust' QBSO, but markets on lookout for inflation signals as NZD falls

By Kymberly Martin

In a relatively quiet start to the week, assisted by the AU public holiday, NZ yields closed little changed.

Overnight, US 10-year yields drifted down to 2.41%.

NZ swaps pushed a fraction higher yesterday morning, but declined into the close, to end the day not far from flat.

NZ 2 and 5-year swap sit at 4.07% and 4.35% respectively.  For reference, based on our current OCR track (resumption of hikes next March and a 4.75% peak in early 2016), current 2-year ‘fair value’ is around 4.40%.

We do not see a catalyst to achieve this level any time soon. However, we do believe a break to the high-side of 2-year’s recent tight range is more likely than a break lower.

Overnight, some poor August German factory orders (-5.7%m/m vs. -2.5% expected) highlighted further cracks in the growth engine of the Eurozone.

German 10-year yields slumped back toward their historic lows, closing at 91 bps. US equivalents also drifted lower in the early hours of this morning, trading around 2.41% currently.

Today brings this week’s domestic data highlight, the Quarterly Survey of Business Opinion. We expect it to be robust overall.

But from a rates perspective we will be particularly interested in the pricing and cost variables, as pre-cursors to inflation.

They may be capped for now due to the historically high levels of the NZD. However, we will be watching these like a hawk if (as) the NZD TWI continues to decline in the year ahead.