Although markets don't see an OCR cut next week there are four reasons why they just might. ECB signals more stimulus

By Kymberly Martin

NZ swaps largely followed offshore moves lower yesterday, closing down 2-5 bps.

Overnight, US 10-year yields have drifted down to 2.01%.

The NZ market remains fairly range-bound ahead of next week’s RBNZ meeting, taking its cues from moves offshore. This saw NZ 10-year swap close down 5 bps, flattening the 2-10s curve to 78 bps. Our preference remains to position for steepening within an expected 60-120 bps range.

At the short-end, the market still prices little chance (circa 20%) of a RBNZ rate cut next week. We remain ambivalent as to whether the Bank cuts next week or holds off until its December meeting.

Factors that might suggest a cut next week are (i) the NZ TWI is now around 7% above the RBNZ’s Q4 projected average (ii) despite a rebound in GDT dairy prices, this sector still faces very tough conditions (iii) business confidence has turned down (iv) if the RBNZ sees itself easing further, then why delay? However, we still see the meeting as too close to call.

Overnight, German yields gapped lower after ECB’s Draghi signalled this morning that the Bank will consider increasing its asset purchase programme. German 10-year yields now trade at 0.50% from 0.58% prior to the ECB’s meeting. US equivalents experienced some volatility and now trade at their lows for the night, at 2.01%.

These overnight moves will likely see downward pressure on the long-end of the NZ curve this morning. Otherwise there are no data scheduled domestically today.


Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

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for(i=0;i

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