RBA worried about low commodity prices and high AUD; GDT disappoints; US anticipates strong jobs data

By Kymberly Martin

NZ swaps rebounded 3-4 bps yesterday.

Overnight, US 10-year yields pushed up from 2.23% to 2.28%.

NZ yields followed the direction of the previous night’s offshore moves and the tone set by AU bond futures that continued a sharp sell-off. On a relative basis however, NZ long-end yields outperformed. NZ 10-year swap closed up 4 bps and 10-year bond up 2 bps.

The yield on 2 and 5-year swap closed up at 3.90% and 4.10% respectively. 2-year remains near the lower end of the 3.85%-4.00% range we sustaining in months ahead.

Yesterday the RBA left its cash rate unchanged at 2.50% as widely expected, and reiterated its statement that a period of stability for rates was required.  There were no significant changes to its view on the domestic economy.

However, there were two other notable changes. First, it described commodity prices declines as significant and it reintroduced the statement that “a lower exchange rate is likely to be needed to achieve balanced growth”. However, there was no hint at needs for a future rate cut. AU 3-year swap closed up around 4 bps at 3.97%.  The market now prices around a 60% chance of an RBA rate cut by Q3 next year.

Overnight, the latest GDT dairy auction showed average prices down 1.1%. This will disappoint those looking for some rebound in prices, but is unlikely significant enough to impact on NZ short-end rates pricing this morning.

Rather, the dominant influence from overnight will likely to be the push higher in US yields. In the absence of key data releases, US 10-year yields pushed up from 2.23% to 2.28%, potentially pre-positioning in anticipation of a strong US payrolls report on Friday.