Markets under-estimate the pace of future RBNZ rate hikes especially if the currency subsides: BNZ

By Kymberley Martin

NZ swaps closed up 1-3bps across the curve yesterday.

Overnight, US 10-year yields pushed up to 2.58%.

NZ 2-year swap closed up 1 bps at 3.94% as we continue to see steady flow of paying via the mortgage book.

The curve steepened a little as longer-dated swaps followed their offshore counterparts higher. The NZ 2-10s swap curve now sits at 82bps.

The spread between NZ and AU 2-year swap has traded a very tight range between 108bps and 120bps since mid-March. 

The market prices the RBA cash rate will be virtually unchanged in 12 months’ time while the NZ OCR will be 80bps higher. AU expectations are reasonable, in our view, but the market under-estimate the pace of RBNZ rate hikes.

We see NZ-AU spreads ultimately breaking to the upside, with NZ-AU 2-year swap spreads above 140bps by year-end.

It is worth noting, the NZ TWI (78.80) is now only 0.5% above the RBNZ’s forecast average for this quarter.

If the currency continues to subside, this will provide less reason for the RBNZ to consider slowing its rate hiking process.

Yesterday, the RBA left its cash rate unchanged at 2.5% reiterating its neutral bias. It would still like to see a lower AUD, but stated “the most prudent course is likely to be a period of stability in interest rates”.

Overnight, in the absence of key US data releases, US 10-year yields pushed up from 2.52% to 2.58%, their highest level since mid-May.

Today, ANZ commodity prices will be released domestically and AU Q1 GDP across the Tasman.

Tonight the US non-manufacturing ISM and the Fed’s Beige book survey of the economy will be released. In addition, the US ADP employment report is due, which the market often extrapolates as a precursor to Friday’s payrolls report.