NZ rates and NZD surge post RBNZ MPS. No follow-through overnight, as USD recovers. NZD pushes higher on the crosses

Global equities continue to rally in the aftermath of the positive vaccine news earlier in the week and the result of the US election. The US bond market is closed for Veteran’s Day. With a stronger USD overnight, there has been no follow-through for the NZD, after its strong rebound post the RBNZ’s MPS, which drove domestic rates much higher. However, the NZD has continued to push slightly higher on the crosses.

There hasn’t been much news overnight, with few headlines and no economic data of note. The S&P500 is currently up 0.8%, with a recovery in tech stocks supporting a stronger 1.9% gain for the Nasdaq index, bringing to a halt the evident switch out of growth into value stocks earlier this week after the positive vaccine news. Chinese tech companies have lost around $290bn in market value over the past two days as the Chinese regulator rolls out new anti-monopoly regulations, and there has been no spillover effect into the US tech sector – the market taking the view that political gridlock won’t see the same regulatory forces in the US.

The market isn’t paying attention to the daily dose of bad news on COVID19 case numbers and hospitalisation rates across the US and Europe, with the view that any negative economic impact will be temporary, ahead of a potential rollout of a vaccine from Q1 next year. In the US, the number of people hospitalised by COVID19 reached a record high of around 62,000, surpassing the April peak in the first wave of the virus and the second wave in late July. The hospitalisation rate is likely to soar further as case numbers continue to rise to record highs. The covidexitstrategy.org site classes all but two US states as having an “uncontrolled spread”.

The US bond market is closed for the Veteran’s Day holiday, but futures suggest a 1-2bp fall in the US 10-year since the NZ close, while Australian 10-year bond futures imply a 2-3bps fall.

The USD is stronger across the board overnight, regaining some poise following its recent hammering that saw it down to a 2½-year low early in the week. So there has been no follow-through in the NZD overnight, after the surge after the RBNZ’s MPS yesterday. The NZD peaked at 0.6904 and has settled between 0.6860-0.6880 over the past few hours.

At the RBNZ’s MPS, the Bank provided further stimulus via a new Funding for Lending Programme (FLP) that will commence next month. The FLP will provide 3-year loans to banks at the prevailing OCR through the next 18-months, with the size of the programme in the order of $20b, with further funds available to banks that achieve certain lending targets. Earlier in the day, the RBNZ further delayed (by one year) the proposed starting date for increases in bank capital to July 2022. The Bank also is looking to reinstate loan-to-value restrictions on so-called higher-risk investor lending from March next year.

A key takeout from the MPS was that the economy was much stronger than previously expected, which the Bank’s model suggested about 90bps of less stimulus required, as measured by its “unconstrained” OCR track. If we add in the stimulatory impact of the new FLP, then there will be much less need for the Bank to provide further stimulus from here, even if the Bank maintained a clear easing bias.

While none of this was particularly surprising, the market decided it was the right time to stop out of trades that had embodied future negative rates, something that has been happening to some extent over recent days. With a one-sided market, there was a violent sell-off in the OIS market, with momentum growing as economists rolled out changed OCR rate calls, including the BNZ. We now see the Bank keeping the OCR unchanged at 0.25% for some time. The OIS market still prices in the risk of the RBNZ cutting rates again, but not nearly as aggressive and no longer into negative territory, with the terminal OCR down to about 0.1%. The 2-year swap rate ended the day 11bps higher at 0.21%. The sell-off at the longer end of the curve was even greater, with 10-year swap up 14bps to 0.84%. NZGB yields were up 11-16bps, with a steeper curve evident.

While a stronger USD overnight has held back further upside for the NZD, the NZD has drifted higher on the crosses. The AUD has found the air thin above 0.73 and has fallen back down to 0.7270, with NZD/AUD pushing up to 0.9450. NZD/GBP has pushed up through 0.52, while NZD/EUR is at 0.5840. NZD/JPY is up to 72.50, its highest level since January.

In other overnight news, ECB President Lagarde, speaking at the ECB’s annual forum, said that emergency bond purchases and long-term loans will likely remain the main policy tools for adjusting monetary policy. She stressed that the duration of policy support matters as well as the level of financing conditions. These comments come after the ECB signalled at its last meeting that more stimulus will be forthcoming in December. While the market has thought about the chance of the ECB taking the deposit rate deeper into negative territory, it would appear that this is the least preferred option of the ECB.

Bloomberg reported that EU-UK trade talks are looking like extending into next week, missing this weekend’s informal deadline. Some progress has been said to be made, and the extension should be seen as a positive sign, with some sort of agreement in sight.

Oil prices have continued on their recovery path this week, with prices up 2%, supported by API data showing a large drop in US crude oil inventories. Brent crude broke above USD45 overnight and is knocking on the door of the highs seen during August/September.

UK Q3 GDP data tonight are expected to show a strong bounce-back in activity in Q3, as we’ve seen in other countries coming out of strict lockdowns in Q2. US CPI inflation should remain on the soft side, while expect some more headlines coming out of the ECB Forum, BoE and Fed chiefs weighing in.