NZ 2-year swap rate anticipated to trade down towards 2%; risk of RBNZ rate cut increases if TWI holds at current levels

By Kymberly Martin

It was a reasonably quiet start to the week for NZ rates markets. NZ swap and bond yields closed up around 1-2bps across the curve. Equally, offshore trading overnight appeared devoid of dramas.

US 10-year yields currently sit at the centre of the 1.70-1.75% path they have traded overnight.

NZ 2-year swap closed at 2.19%. The market prices around 45bps of RBNZ cuts within the coming year, but only around a 40% chance of a cut on 28 April.

Domestic data this week are unlikely to materially change the market’s pricing for the RBNZ’s cash rate. They will likely simply confirm what we already know, that NZ growth is solid while inflation is subdued.

However, we see increasing risk of a cut at the April meeting. The longer the NZ TWI holds up at current levels the greater the risk the RBNZ will deliver its intended next rate cut, early.

Tomorrow morning’s release of food prices is the final piece of data that could influence our pick for Q1 CPI, due for release next Monday. We currently look for a 0.3% annual number, below the RBNZ’s forecast of 0.4%. This could be sufficient for the market to increase its pricing of an April cut to more than 50%.

We see NZ 2-year swap likely to consolidate this week. However, we continue to anticipate that it can trade down toward 2.0% in weeks/months ahead. We expect that on delivery of an RBNZ cut the market will be inclined to price more.

Overnight, in relatively calm markets and limited data flow, US 10-year yields briefly popped their head above 1.75% before returning to trade at their current level of 1.72%.

The market continues to price less than a 50% chance of a further US Fed hike by year-end. 

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