NZ swaps closed down a further 2-3 bps yesterday.
US 10-year yields now trade at the lower-end of overnight ranges.
It was a relatively quiet day in the absence of domestic data delivery yesterday. Furthermore, the RBA’s June Minutes did not add anything to the Bank’s June post meeting statement. In the Governor’s words, “the RBA is open to the possibility of further policy easing, if that is, on balance beneficial for sustainable growth”.
The key word “sustainable”, suggesting the Bank has no immediate intention to ease. Our NAB colleagues do not call for any further cuts to the cash rate, from its current level of 2.00%.
The market currently prices around a 66% chance of a further 25 bps cut from the RBA in the year ahead. The market prices around 40 bps of cuts from the RBNZ. This appears a reasonable representation of risks at present.
We see NZ 2-year swap trading a 3.0-3.3% range in the coming months, with a preference to receive at the upper-end of this range. The 2-year swap closed yesterday at 3.16%. The 2-10s curve sits a little below recent highs, at 85 bps. After a period of consolidation we anticipate further steepening in the curve to above 100 bps by year-end.
Overnight, US and German 10-year yields made intra-night lows after the German ZEW survey came in below expectation, pointing to the impact of the Greece crisis. Having subsequently touched intra-night highs above 2.35%, US 10-year yield now trade at 2.32%.
It is now all eyes on tomorrow morning’s US FOMC meeting.
Two elements will be key. First, any revision to the committee’s medium-term ‘dot point’ for the Fed funds rate. Directionally they are likely inclined to drift lower. Second, whether the Fed is seen to be clearly warming up the market for an imminent first rate hike. We continue to have a first hike pencilled in for September.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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