The NZ swap curve steepened yesterday as short-end yields fell.
Overnight, US 10-year yields fell from 2.46% to 2.37% following the release of US payrolls data.
The weak GDT dairy auction prompted the market to increase expectations of RBNZ rate cuts and for short-end swaps to slump yesterday. The market now prices that the OCR will fall to 2.71% in the year ahead (from its current level of 3.25%).
NZ 2-year swap closed down 8 bps, at 3.02% while 5-year closed down 5 bps at 3.40%.
Market pricing is a fair representation of current risks. However, it is worth bearing in mind the recent sharp fall in the NZ TWI. At 70.50, the NZ TWI is now trading below the level the RBNZ had projected over its entire forecast period out to mid-2017, as at its June MPS. The TWI is also nearly 6% below the level the RBNZ had projected for the current quarter average.
This move will no doubt be welcomed by the RBNZ. But if the currency moves are sustained it will necessarily put upward pressure on inflation forecasts. All else equal, a sharply lower currency will require less monetary easing via cuts to the OCR. If we feel the market is getting too carried away in pricing rate cuts will start to look for short-end hedging opportunities.
Overnight, US and German 10-year yields pushed higher ahead of the release of US payrolls data. Yields then dropped quite sharply in response. US 10-year yields now sit mid-range, at 2.38%. US 2-year yields also dropped form 0.70% to 0.63% on the release.
The moves will likely result in a ‘bull’ flattening of the NZ curve today. Otherwise it looks to be a relatively quiet end to the week.
There is an absence of domestic data releases, the US is celebrating Independence Day holiday, and the Greece situation remains in suspended animation until after Sunday’s scheduled referendum.