RBA expected to want more time to assess Aussie election downsides. QV data to highlight RBNZ dilemma. High NZD raises expectations of a OCR cut

By Kymberly Martin

NZ swap and bond yields closed down 1-2 bps yesterday.

The US Treasury market was closed overnight, but the general direction for core European yields was lower.

There was little on the local calendar to provide direction for NZ yields yesterday. NZ 2-year swap closed down 2 bps, at 2.18%. The market prices slightly more than a 60% chance of an OCR cut on 11 August and around a 1.85% OCR trough within the year ahead. By contrast, the market prices that the RBA’s cash rate will be cut to 1.40%within this time.

Our core view is that both cash rates will trough at 1.75% (where the RBA’s cash rate currently sits). However, the risks around this view are that the RBNZ delivers a little less and the RBA a little more. That said, overnight the NZ TWI has pushed on up to its highest level since early-May last year. It is a full 8% above the RBNZ’s projections for the TWI’s average this quarter. If this level sustains then an August cut appears highly likely.

Overnight, while the US Treasury market was closed for Independence Day, core European yields drifted lower. German 10-year yields declined from -11 bps to -14 bps, while UK equivalents have made historic lows at 0.83%.

Today, the RBA will meet. The focus will be the post-meeting Statement and whether the RBA adds in an explicit easing bias after omitting any bias at the June meeting. Our NAB colleagues view is that with AU domestic activity performing relatively well there is no need for further easing, unless inflation were to surprise significantly to the downside. The next inflation update is published 27 July. However they do expect the RBA to acknowledge recent financial market volatility. We expect it to conclude more time is required to assess whether it will lead to lower global and domestic demand.

Also look out today for the release of NZ QV house price data. These will likely serve to highlight the RBNZ’s dilemma as it considers further rate cuts, while national house prices are bubbling along.

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