By Kymberly Martin
NZ swaps closed down 3-5 bps across the curve yesterday.
Overnight, US 10-year yields traded down from 2.08% to 1.99%.
NZ swaps initially opened lower following the previous night’s decline in yields. Yields declined a little further into the close after the release of the RBNZ’s Q1 survey of 2-year-ahead inflation expectations (1.8% from 2.06% prev.).
These forecasts appear to be closely linked to contemporaneous inflation readings.
On that basis we would see inflation expectations close to bottoming, with a rebound expected later this year.
NZ 2-year swap closed at 3.59%. We continue to see a further pullback to below 3.50% (consistent with the market pricing at least 25 bps of OCR cuts) could set up a hedging opportunity.
Currently the market prices around 70% chance of an OCR cut by this time next year. Meanwhile the 2-10s swap curve remains at 24 bps. We see further steepening over the medium-term, contingent on a further rise in US long yields.
Overnight, US yields slipped across the curve after comments from Fed Chair Yellen to the Senate. Displaying her dovish tendencies she said too many in the US were still unemployed “wage is growth is still sluggish and inflation remains well below our longer-run objectives”.
However, she did concede recent low inflation readings largely reflect the plunge in the oil prices. US 10-year yields slipped from 2.08% to 1.99%. December Fed fund futures have dipped to 0.49% from 0.51% yesterday.
The overnight moves will likely exert downward pressure on the NZ curve today in the absence of domestic data releases.
The market will then look toward further testimony from Yellen and ECB’s Draghi tonight.
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