By Jarrod Kerr*
Today we pay our way in Kiwi.
Paying Kiwi rates still feels alien to this old “receive everything” warhorse, but I refuse to fight the flow. One cannot be a warhorse without a few battle scars. The stitches of recent received positions have yet to be removed. But I’ve changed sides.
Have no fear, I have avoided my scheduled lobotomy to support the Wallabies. I still support the All Blacks. But I have switched to calling Kiwi rates higher.
I did so after the Trump victory “Kiwi interest rate forecasts revised higher on Trumpification”.
My worry now is the weight of money, switching and fixing. We have already paid the 1y1y rate from 2.39% (now 2.43% so not a big move). We want more exposure. So today we pay to 1y2y rate from 2.65%. The same idea but with a bit more curve.
We also recommend a received position in OIS. I just couldn’t help it. Old habits die hard…
To any balance sheet, corporate or trader with the ability to pay a fixed rate in Kiwi, now is still the time.
It is easy to look at current levels in disbelief compared to where they were. The US election has catapulted rates into another league. Strategically, there are plenty of risks that could bring rates crashing back down. Tactically, there are plenty of mums and dads willing to lock in safety at a cheap price.
If you face a variable rate 50 to 70 bps above 1‑to‑3 year fixed rates, what would you do? And you’ve just been told the RBNZ is done cutting and next move may be a hike. Even if the RBNZ cuts once more, the banks didn’t lower the variable rate following November’s cut.
Bank funding costs continue to rise. Fixed rates offered are priced off the swap curve. The swap curve is higher, and only the 3 and 5 year rates have lifted (to a lesser extent). No matter how you slice or dice it, paying fixed rates versus floating in Kiwi is a compelling argument. But we’re not interested in the argument. We’re interested in how banks hedge the flow. They pay fixed.
Now… a received position in November OIS at 1.92% makes sense, to me. If I’m wrong and the RBNZ musters up the courage to hike, then we lose 8 bps to 2.0%. If I’m right, and the RBNZ cut, well we get 42 bps to 1.5% (but more likely to get +50 bps as we price more). If the consensus is right and the RBNZ do nothing, then we make 17 bps to 1.75%.
Jarrod Kerr is the director of interest rate strategy at the Commonwealth Bank of Australia, based in Sydney. This piece is an extract from this daily publication. It is here with permission.