Market pricing 20 bps of interest rate cuts in next year

Market pricing 20 bps of interest rate cuts in next year

By Mike Burrrowes


The NZD/USD eased a little lower on Friday, to be the weakest major currency on the week. The NZD declined 3.67% relative to the USD on the week, to 0.7560.

Last week saw a broad strength in the USD as risk appetite remained subdued and markets bounced from one European debt headline to the next. As a “risk sensitive” currency, the NZD declined sharply on the week, also undermined by a steep fall in NZ interest rates. The market has moved to price around 20bps of rate cuts from the RBNZ in the coming year. NZ short-end swap yields declined by more than 20bps on the week. The NZ-US 3-year swap spread fell from 239bps to 201bps on the week. The NZD/USD declined from 0.7850 to 0.7560.

In the absence of major data releases on Friday, the NZD/AUD drifted off from around 0.7590 to 0.7560. With the sharp fall in NZ yields, the NZ-AU 3-year swap spread fell from -95bps to -113bps last week. Ultimately, we believe this differential will narrow, as we do not expect rate cuts from the RBNZ. In the near-term however, it is difficult to see what will stop markets pricing further RBNZ rate cuts, until some stability in Europe materialises.

The NZD drifted relative to both its European peers on Friday. It closed the week at 0.5590 relative to the EUR and at 0.4790 relative to the GBP, its lowest level since May.

The week ahead will culminate in the NZ general election on Saturday. Today we get credit card billings. Tomorrow’s RBNZ survey expectations will be closely dissected to see if 2-year ahead inflation expectations have dropped further from the 2.9% recorded in Q3.


It was a relatively quiet day of consolidation on Friday. The USD index eased lower, while the EUR outperformed. The NZD was the weakest performer, being the only major currency to decline relative to the USD. However, overall it was still a strong week for the USD index that rose 1.50%.

Friday saw relative calm descend on markets with the S&P500 closing flat on the day, and Euro Stoxx50 down just 0.27%. The CRB broad global commodity index fell a modest 0.70%. Our risk appetite indicator (scale 0-100%) rose slightly to 31%. In European debt markets, the ECB was rumoured to be purchasing bonds in order to settle markets.

The USD index dipped as low as 77.54 in the early hours of Saturday morning. The US leading indicator surprised to the upside (0.9% vs. 0.6%), helping to underpin a rally into the close. The USD index closed at 78.00.

The EUR showed some volatile trading on Friday night, whipped around by rumours (later denied) that the Russian central bank was looking to buy EFSF debt. The EUR/USD rose above 1.3600 before falling off to close at 1.3520. The market was looking toward the Sunday general election in Spain. Voters were expected to overthrow the Socialist ruling party that they hold responsible for the dire economic situation. This would be the latest in a series of political casualties resulting from the European debt crisis.

The AUD/USD closed down around 2.60% on the week.  Trading in the currency on Friday was quite choppy. It touched as high as 1.0100 overnight before retreating to close at 1.000.

In the week ahead, all eyes will be on the last-ditch efforts of the US ‘super committee’ to try to reach some agreements ahead of their 23 Nov deadline. They have been charged with finding at least $1.2 trillion of US budget savings.

Other key developments to watch will be the FOMC and BoE minutes released respectively on Tuesday and Wednesday this week. We also get Eurozone consumer confidence on Tuesday. On Wednesday we get Chinese and European PMI data along with US durable goods orders and the University of Michigan confidence release.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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