Differing policy tracks between NZ and the US will see local rates steepen to year end. Eyes on Australia and Asia today

By Kymberly Martin

NZ swaps closed 1-2 bps higher yesterday in a reasonably quiet start to the week.

Overnight the US Treasury market was closed for US Labour Day and German yields traded a tight range.

Global risk appetite remained fairly muted at the start of the week as Asian equities declined further. However, NZ swaps closed a fraction higher across the curve, as we head toward the main event for this week, Thursday’s RBNZ meeting.

Ahead of this meeting, the market is pricing around a 90% chance of a 25bps cut. A cut this week, may therefore produce only limited response from the market, if it is delivered as we suspect, without an aggressively dovish message. We suspect this week’s decision may not be sufficient to see NZ 2-year swap down at 2.70%, though we continue to look for this level in the months ahead. Our central case remains the RBNZ will follow with another rate cut in Oct.

Yesterday, 2-year swap closed at 2.81% with the 2-10s curve at 81 bps. We continue to see the curve biased to steepen through to year-end, within a 60-115 bps range. This expectation is underpinned by our view the RBNZ will cut by 50 bps (slightly more than current market pricing) and the US Fed will hike rates, by year-end.

Overnight, while the US Treasury market remained shut and Eurozone data came in below expectation, German 10-year yields traded a fairly tight path between 0.65% and 0.69%.

Today, in the backdrop of 2nd tier domestic data releases, attention will likely fall across the Tasman, on a scheduled speech by RBA’s Ellis on, “Property Markets and Financial Stability”. This may rhyme with recent concerns expressed by the RBNZ. General sentiment may also be influenced by China trade data due today, as well as the state of Asian equity markets.

Kymberly Martin is on the BNZ Research team. All its research is available here.