RBNZ MPS a market-mover as the Bank signals rate hikes from next year. Stronger USD overnight sees NZD lose some of its post-MPS gains, now back below 0.73. NZ rates much higher, with the 5-year rate up the furthest

There has been little newsflow overnight to drive markets. US equities show small gains and the US 10-year rate has traded a tight range. The NZD has moved back below 0.73 following the post-MPS rally, driven by a stronger USD overnight.

There is little to report on offshore developments, with no notable economic releases. On the 125th anniversary of the Dow Jones index, US equities continue to consolidate near record highs. The S&P500 has spent most of the day in positive territory and currently shows a small gain.

The US 10-year rate has traded a tight 1.55-1.58% range. Germany’s 10-year rate shows a more notable move, down 4bps to minus 0.21%, taking its fall over the past week to 13bps as the market adjusts its view on the June ECB meeting. Expectations of a June tapering of bond purchases have been quashed as a few voting board members hose that view down.

ECB executive board member Panetta is the latest, saying that “the conditions that we see today do not justify reducing the pace of purchases”, adding that he wanted to see a sustained increase in inflation pressures before tapering purchases. This reference to inflation was a shift to the goal posts, given that the pandemic purchase programme was originally proposed to continue until at least the end of March 2022 and until it judges that the coronavirus crisis phase is over, so not specifically tied to inflation. His comments follow dovish comments by the Greek and French central bank governors and those of ECB President Lagarde at the end of last week, saying it was “far too early, and its actually unnecessary to debate longer-term issues”.

Panetta’s comments dampened support for EUR, seeing it fall 0.5% to back below 1.22. The USD has showed broadly based strength, with traders reporting some earlier than usual month-end demand driving it higher into the London 4pm fix, given the US and UK holiday on Monday.

USD gains have taken the edge off NZD strength seen after the RBNZ’s MPS, with the NZD currently trading at 0.7290 after reaching a high of 0.7316 soon after the NZ close. The 0.7315 level has been a previous level of resistance, back in January, so now it is back on the radar, ahead of the next resistance level at February’s high of 0.7465.

Onto the MPS, as widely expected, the RBNZ left all its policy settings unchanged and incorporated the stronger global backdrop, much stronger NZ labour market, easier fiscal policy from last week’s Budget and the higher inflationary pressure that is clearly evident.  All this made the Bank more confident in its forecasts such that it was prepared to re-publish an OCR track spanning the forecast period.

The surprise to the market was that the Bank was so transparent in projecting a rising OCR from the middle of next year, cumulating to a chunky 150bps of rate hikes over the subsequent two years. The new rate track is similar to the BNZ economists’ view, which for some time has had a series of rate hikes pencilled in from May 2022. Governor Orr and Assistant Governor Hawkesby were keen to point out in the press conference that the OCR track is not forward guidance and highly conditional on the economic recovery, but the market isn’t one to get bogged down in such semantics, so the natural reaction was higher rates across the curve and a stronger NZD.

Under the circumstances, the market reaction was fairly well contained, given the market always saw a rising chance of rate hikes from next year anyway and, even on the Bank’s projections, a rate hike might still be at least a year away. The belly of the curve took the brunt of the hit, with the 5-year swap rising by about 15bps to 1.31% post-MPS, taking the rise for the day to 12bps, after being lower pre-MPS. The 2-year swap rate rose by 7bps for the day to 0.61%, while 10-year swap rose by 8bps to 2.0%.

While there was no formal change to the LSAP programme, there was a nod to the fact that it now won’t hit the $100b limit allowed by the MPC. Indeed, on our maths the programme size will be lucky to get to $75b. The Bank likely kept next week’s NZGB buy-back to $300m to see how the market settles post-MPS.  Governor Orr was reluctant to be drawn into a taper debate in response to a question at the press conference, but there is a strong case for the Bank winding down its bond purchasing programme over the next 6-9 months.

NZGB yields showed a flattening bias from about four years onward and the 10-year rate closed 9bps higher at 1.88%. Earlier in the day, NZ Debt Management published the tender schedule for June, showing an ongoing weekly run-rate of $300m-$350m and reminded the market of its intention to launch via syndication a new May-2032 bond during the month.

Also of note, yesterday morning Fonterra published an opening milk price forecast for the FY22 season of $7.25-$8.75, so an $8 mid-point. This was a strong opening forecast, beating the previous record high of $7 (on three separate occasions). It was a reflection of Fonterra’s confidence in the dairy market outlook, and also reflected the fact that the NZD hasn’t kept pace with the strength in world dairy prices, an argument we have been running with. Based on NZ’s near-record strong terms of trade, it isn’t hard to justify an NZD value north of USD0.80.

The post-MPS bounce saw the NZD higher on all the crosses. NZD/AUD has broken up through 0.94 overnight. We see 0.9420 as a resistance level, around the March high, ahead of further resistance just under 0.95. NZD strength had some positive spillover effect on the AUD, seeing it stretch up to just below 0.78, but the move wasn’t sustained and the currency has actually been one of the weakest majors overnight, now down to 0.7745.

The only other notable thing to note on currencies is USD/CNY breaking below 6.40 yesterday, after the PBoC’s reference rate fix didn’t imply any discomfort with CNY’s recent strength. USD/CNY went below 6.39 last night and has just settled above that figure.

In the economic calendar ahead, there are a number of US releases including durables goods orders, jobless claims, the second estimate of Q1 GDP and pending home sales.