It was a reasonably quiet end to the week for NZ markets, following on from the closure of the US market on Thursdayfor Thanksgiving Day.
On Friday night, US 10-year yields traded lower along with the global oil price, to end the week at 2.36%.
NZ short-end yields closed little changed on Friday. 2-year swap ended the week at 2.27%. We continue to see this as close to ‘fair value’ based on our view the RBNZ will keep the OCR at 1.75% throughout next year, before starting a hiking cycle in late H1 2018.
We believe the cyclical lows for short-end swaps are now in place (back in August). But we expect some consolidation is likely now due. A 2.10-2.35% range for 2-year swap continues to look viable to us, in the months ahead.
Equally, the long-end of the NZ curve appears due for a period of consolidation after its globally-inspired surge higher from early-November. NZ 10-year swap closed on Friday at 3.32%, now almost 80 bps above its early-October lows. The 2-10s curve trades at 105 bps. Ultimately we anticipate this will steepen further, to 125 bp, in the months ahead.
On Friday night, in thinned, post-Thanksgiving Day trading, US Treasuries took their cue from developments in the global oil market. The WTI oil price fell 4%, as Saudi Arabia pulled out of planned talks with OPEC and non-OPEC nations including Russia. Disagreement about how to share the burden of supply cuts (in order to boost prices) stands in the way of a deal, with just days until OPEC’s meeting on 30 November, in Vienna.
Alongside the slide in the oil price, US 10-year yields slipped from early afternoon highs. From 2.41%, they ended the week below 2.36%. This will likely see NZ yields open a little lower this week. At the short-end of the US curve the market is fully priced for a Fed hike on 14 December.
It looks to be a relatively subdued start to the week. The highlights will come later on, in the form of Wednesday’s OPEC meeting, Friday’s US payrolls data and the weekend’s Italian referendum and Austrian elections.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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