NZ swaps closed down 3-5 bps yesterday.
Overnight, as the global equity rout continued, US 10-year yields dipped toward 1.90%, before returning to trade at 2.04%.
Following the lead of moves offshore and significantly heightened risk aversion, NZ swap and bond yields fell across the board yesterday. NZ 2-year swap closed at 2.82%, its lowest level since May 2013.
We continue to expect 2-year swap will trade down toward 2.70% in months ahead as the RBNZ cuts the OCR to 2.50% by its Oct meeting.
We remain fairly comfortable with this view, following the RBNZ’s speech on the NZ property market yesterday afternoon. However, the speech squarely acknowledged that low interest rates were contributing to housing demand and prices pressures, particularly in Auckland. This is one of a number of factors that prevent us getting too carried away in our expectation for OCR cuts.
Equally the Bank said that “current weakness in export prices, economic activity and CPI inflation mean that interest rate increases are likely to be off the table for some time”. Like many Central Banks globally, the RBNZ is currently walking a tight rope between low CPI and high house price inflation.
The NZ curve also flattened a little further yesterday as 10-year swap closed at new historic lows of 3.48%. With time, these levels will likely attract corporate paying activity out to the longer-end of the curve. However, there will be little rush while global ructions continue.
Overnight, in extreme volatility across all markets, US 10-year yield plunged toward 1.90% as the S&P500 index opened down 5%. However, as the equity index has grappled its way higher, so too have US yields. US 10-year now trades at 2.03%. Fed funds futures are pricing little chance of a Sept hike and just a 0.235% Fed funds rate by year-end.
Global credit spread proxies have also pushed wider on both sides of the Atlantic. The Aussie iTraxx index yesterday pushed up to 116, its highest level since October 2013. A push above these levels has historically been consistent with NZ credit spreads being marked wider.
Today, we expect the NZ curve will likely experience further flattening pressure.
Domestically the RBNZ’s inflation expectations series will be in the spotlight today. This has grown in stature in recent times. The market obsesses about the decimal point of readings, in the current low CPI environment domestically and globally. An inch higher from Q2’s 1.85% reading would be welcome, but any slippage would only encourage the market in pricing RBNZ rate cuts. Otherwise all eyes remain on Asian markets and on equity/credit markets in particular.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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4 Comments
This comes from the Memorandum to the Governor of the Reserve Bank of New Zealand - Reconfirmation of direction to the Reserve Bank to intervene in the foreign exchange market under section 17 of the Reserve Bank of New Zealand Act
3. In a period of market dysfunction, it is recognised that the Bank may need to intervene very quickly, where it is not possible to first obtain a direction from the Minister of Finance. In recognition of this, as Minister of Finance I hereby give the Bank a standing direction, pursuant to section 17 of the Act, to intervene in the foreign exchange market for the purpose of stabilising the market in a period of, or to avoid, market dysfunction, in an amount up to SDR175 million,1 in circumstances where intervention is urgently required and the Minister of Finance or any Deputy or Associate Minister of Finance is not able to be contacted quickly.
It's past time to throw the CPI regulated interest rate benchmark agenda out with the bath tub water, while all other measures of inflation are disregarded - investors are now enduring the unwinding of excesses caused by clinging to this ideological nonsense for way too long. And as we can only acknowledge, one more time - fools and their money are easily parted.
Always keep in the back of your mind - should the fall in the NZ$ become precipitous, the RBNZ will actually have to RAISE rates to defend its value (to prevent an overwhelming surge in imported inflation). Brazil has already had to go down that pathway, as has South Africa (both former commodities power houses). There are other commodities based economies hitting the same wall as we speak. Of course you won't even hear a peep out of the mainstream about this possibility, but just retain that germ of an idea:
http://www.tradingeconomics.com/brazil/interest-rate
http://www.bloomberg.com/news/articles/2015-08-24/rand-s-record-plunge-…
After all the falls in the NZ$ have been rather steep - the most in 30 years reportedly:
http://www.msn.com/en-nz/money/markets/new-zealand%E2%80%99s-kiwi-falls…
Raising rates would be entertaining to watch, but notably Brazil and South African currencies devalued 40-50% more than the NZD has over the last 4-5 years, so we would seem to be a long way from their scenarios.
I would think the RBNZ is welcoming the latest relatively small decline in the NZD, as without it, we'd be headed for deflation.
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