By Roger J Kerr
The downward mini-rally in two to ten year swap interest rates we have witnessed over the past two months appears to be all over.
A combination of stronger economic data in the US which has pushed up their 10-year Treasury Bond yields and a local realisation that the correction to the RBNZ timing with the OCR had probably over-shot a little, has halted the rate decreases.
I am not saying that swap rates will automatically rise from here over coming months, however it is hard to see what could cause the rates to move any lower.
The CPI for the March quarter will be a low one when it is released mid-month, but pricing expectations for the future have been increasing in the various business confidence surveys. By August/September the RBNZ will come to the same realisation as the RBA, that there is no legitimate reason to be holding interest rates at very stimulatory levels when the evidence is that the economic growth is self-sustaining.
The continuing increases in our export commodity prices is very good news for the economy.
The higher international prices when combined with the potential for a lower NZD/USD exchange rate over coming months do provide the perfect climate for stronger export-led economic growth.
Annual growth rates of above 3.0% are possible later in 2010 if the currency comes off.
All our big export industries sell in USD’s e.g. dairy, forestry, fishing and meat. The RBNZ will be well justified in having the OCR back to the “new normal” levels of 5.00% by early 2011 under this scenario.
However, it has to be remembered that these increases in short-term interest rates are merely a flattening of the yield curve with 90-day rates coming up to where the four and five year swap rates are already priced.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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