NZD sustains move higher post RBNZ’s on-hold decision. NZD rates up 10-15bps. Global rates head lower

The NZD and NZ rates have been the biggest movers over the past 24 hours as the market was positioned for an RBNZ rate cut that wasn’t delivered.  The NZD has sustained the initial market reaction and has traded in a tight range overnight, hovering around 0.64. There has been a modest risk-off tone overnight that has seen global rates head lower.

After we went to press yesterday, President Trump’s speech continued and the market didn’t get the confidence it wanted that the US-China trade deal was well on track to be signed, sealed and delivered. Apart from continuing to run the line that a trade deal “could happen soon” Trump said that “if we don’t make a deal, we’re going to substantially raise those tariffs”.  A WSJ article later followed, noting that the logjam in a deal is on “whether the US has agreed to remove existing tariffs…or whether the US would only cancel tariffs set to take effect Dec. 15”. US trade representative Lighthizer was reported as not eager simply to eliminate tariffs without commitments from Beijing.

In overnight news, Fed Chair Powell’s testimony to a committee in Congress ran a similar line to that expressed at the end-October FOMC meeting – a favourable baseline outlook and with noteworthy risks remaining. Powell’s comments and Q&A didn’t move the dial and neither did the key US CPI report, which showed well-behaved core inflation, with the monthly figure coming in weaker than some feared in the market. It only just rounded up to 0.2% m/m, which saw the annual figure weaker than expected at 2.3% y/y. US treasury yields fell soon after the London open and have sustained the move lower. The 10 year rate is currently down 5bps to 1.88%, having traded as low as 1.86% overnight – perhaps indicative that the global bond market is now in a consolidation phase after the big sell-off seen since early October. US equities opened on the soft side but have recovered to be slightly higher.

NZ rates and the NZD have been the biggest movers, following the RBNZ’s Monetary Policy Statement. In what was a finely balanced decision, the RBNZ opted to keep the OCR unchanged at 1.0%. An easing bias remained evident, with risks to the economy said to be tilted to the downside and the committee agreed that “it would add further monetary stimulus if economic developments warranted it”. The Bank wasn’t prepared to cut again, with policy settings seen to be “already stimulatory” and previous OCR cuts this year said to take time to have their full effect. The Bank added that interest rates will need to remain at low levels for a prolonged period to achieve its inflation and employment objectives.

With most in the market expecting a 25bps rate cut, even if many recognised the risk of the Bank keeping policy steady, there was a significant reaction in the rates curve. The 2-year swap rate closed the day 15bps higher at 1.20% and the yield curve flattened, with the 10-year rate up 9bps to 1.61%. Thus, the reaction was close to the possible 10-15bps sell-off we noted yesterday on an unchanged decision, although intraday levels were much higher, with the 2-year marked as high as 1.25% and the 10-year rate as high as 1.69%. The OIS curve still prices the chance of further easing, with about 11bps built into the OIS curve through the next nine months, down to 0.89%, compared to an expected trough in the OCR at around 0.72% prior to the Statement. BNZ’s economic team removed any further easing from its projections, seeing the OCR remaining on hold at 1.0% for the foreseeable future, with the risk skewed to another cut if economic conditions materially weaken.

The NZD rose by over 1% to peak at 0.6417, before settling down and it has traded a very tight range since, oscillating between about 0.6380 and 0.6410. This only takes the NZD back to where it was a week ago, and leaves the currency still significantly cheap on our short-term model. The market probably wants to see a trade deal signed before taking it much higher, but the makings are there for a recovery against a backdrop of improving global economic indicators and stronger NZ terms of trade.

Other currency movements have been modest. A slight risk-off tone sees JPY and CHF outperform, but not by much. Thus the NZD is higher on all the crosses although most of the move came during NZ trading hours. The AUD is slightly weaker at 0.6830, seeing NZD/AUD up 1.3% for the day to 0.9375. It was interesting seeing Westpac’s Australian consumer sentiment index lifting 4.6% in November, continuing the pattern seen through the year of sentiment falling after RBA rate cuts and then lifting after on-hold rate decisions that follow. This provided further evidence that rate cuts at such low levels probably do more harm than good (as also seen in the euro area and Japan), and justifies the RBNZ’s eminently sensible on-hold decision.

The calendar in the day ahead is action-packed, with RBNZ Governor Orr being questioned on the MPS at Parliament first thing. Japan GDP, Australian labour market and China activity data are released this afternoon, with the latter two releases offering up the chance for some AUD and NZD impact if they deviate too far from expectations. European GDP data are released tonight and a number of key Fed speakers will also offer some soundbites, but we wouldn’t expect them to add much to the body of knowledge.