Eyes on central bank moves, especially the ECB who are expected to go deeper in to negative rates. Markets may be harsh if they don't

By Kymberly Martin

NZ swaps and bond yields gave back their previous day’s rise, closing down 1-4 bps.

Overnight, US 10-year yields traded down from 1.90% to 1.81%.

Fonterra’s early-morning downgrade its 2015/16 milk price forecast, and the general downtrend in AU rates yesterday, likely provided some impetus for NZ yields to drift lower across the curve.

NZ 2-year swap closed at 2.43%, while the 2-10s curve flattened to 69 bps.

Ahead of tomorrow’s RBNZ meeting the market is pricing almost 40 bps of cuts within the year ahead. Around a 25% chance of a cut this week is priced.

We continue to see it as unlikely the Bank will cut tomorrow. However, the probability of a cut within the year has risen, which will likely be reflected in the Bank’s tone tomorrow. This should prevent a harsh sell-off in NZ short-end yields even if the Bank does not deliver a cut.

US yields drifted lower throughout yesterday afternoon and evening, along with a fall in German yields.

The downshift in US yields gained momentum early this morning as the WTI oil price again retreated. It is currently down around 3.5%. US 10-year yields have traded down from 1.90% to 1.81% currently. Similarly, US 2-year yields have traded from 0.91% to 0.86%. The market still prices just less than a 70% chance of a Fed rate hike by year-end.

Tonight we have the meeting of the Bank of Canada. It is widely expected to keep its cash rate 0.5%. This will precede the more crucial meeting of the ECB tomorrow night. The ECB is widely anticipated to cut its deposit rate by 10bps, to -0.4%. It will therefore likely need to over-deliver on this expectation to inspire a further sharp fall in German and US yields.

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