The US tax bill was viewed by the market as underwhelming, UST 10yr nudged down to 2.34-2.35%; NZD trades at 0.6920 USD after seeing some resistance at 0.6930-0.6940; global forces have pushed local rates down, 10yr swap down 3bps to 3.15%

By Jason Wong

GBP was slammed after the BoE’s “dovish hike” and the markets sees the US tax bill as a bit underwhelming, keeping the USD in check and helping nudge UST yields lower.

The key market mover overnight was a 1½% drop in GBP to 1.3050 after the Bank of England voted 7-2 to raise its policy rate for the first time in a decade by 25bps to 0.5%, but offered a dovish outlook.  The UK 10-year rate fell by 8bps to 1.26%.  Previous statements have said that more hikes could be needed than financial markets expect, but the Bank omitted that language this time.  The projections assumed market expectations of two more hikes over the next three years, and that would get CPI inflation down to slightly over 2%, suggesting a fairly benign outlook for the policy rate ahead.  NZD/GBP is 2% to around 0.53.

The USD slipped after reports yesterday morning suggested that Powell had got the nod for the new Fed Chair.  We await the official announcement this morning.  The USD TWI majors index has tracked sideways since.  Details of the widely anticipated tax bill have emerged and they haven’t really stirred the market.   The corporate tax rate will be cut from 35% to 20% and the bill would impose a tax of 12 percent on multinational companies’ accumulated offshore earnings, slightly higher than anticipated.  The individual top tax rate will remain unchanged the number of bands will be reduced and the bill would cap the mortgage-interest deduction on new home sales at $500,000. Further negotiations need to take place and a number of hurdles remain for the bill to be passed.

The US 10-year rate nudged down to 2.36% after the Powell-leak yesterday and has slipped further to 2.34-2.35% after the detail around the tax bill has emerged.

The NZD trades at a similar level to the local close around 0.6920, having risen earlier as the USD came under pressure during the local session.  We’ve seen some resistance come in around 0.6930-0.6940 over the last couple of sessions.  We think there’s room for the NZD to recover further as domestic political risks fade, with an eye on next week’s RBNZ MPS as an additional possible source of upward pressure.

The soft USD backdrop and better than expected trade and building approvals data have supported the AUD, albeit with no further progress overnight, trading around 0.7720.  NZD/AUD has traded in a fairly tight range overnight and sits this morning at 0.8970.

Much of the modest gains for NZD/EUR and NZD/JPY were seen in the local trading session yesterday, with overnight moves muted.  The crosses are at 0.5935 and just under 79 respectively.

Global forces helped nudge NZ rates down, with slightly lower UST rates and a squeeze in Australian 10-year bond futures helping the NZ 10-year government rate fall 4bps to 2.89%.  That took the NZ-US 10 spread down to 53bps, its lowest level since 1999 – showing no signs of a domestic political risk premium or concerns about a likely increase in the bond tender programme as NZ fiscal policy eases.  Relative NZ-US monetary policy is the dominant force at present.  We do wonder how much longer that can continue but offshore players still seem keen to receive NZ rates.  The 2-year swap rate fell by 1bp to 2.16% and the 10-year rate fell by 3bps to 3.15%.

The focus tonight turns to the US employment report, which is expected to show a large bounce-back (+310k) in non-farm payrolls from the hurricane-distorted reading the previous month. Just as important will be the unemployment rate and wage data.

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