New Zealand bonds close modestly higher on hopes of easing from RBNZ

The New Zealand government bonds closed modestly higher on Tuesday as investors had anticipated a further easing from the Reserve Bank of New Zealand (RBNZ) in its upcoming policy meeting in the wake of rising deflationary pressure.

On the other hand, country’s trade balance stood positive for the sixth consecutive month in June, which limited the fall in bond yields.

The yield on benchmark 10-year bond, which moves inversely to its price, slid 1 basis point to 2.235 percent, the yield on 7-year note dipped 1/2 basis point to 1.985 percent and the yield on short-term 2-year note ended 1 basis point lower at 1.870 percent.

Last week, the Reserve Bank of New Zealand in its unscheduled economic outlook update concluded that it is likely that further policy easing will be required as a decline in the exchange rate is needed.

The central bank added the monetary policy will continue to be accommodative and long-term inflation expectations are well anchored. Also, the NZ dollar rate is holding down tradable good inflation and currency markets make it difficult to meet inflation objective.

Lastly, the surprised assessment mentioned that more easing is possibly needed to return inflation to target as many uncertainties hover around the country’s economic outlook.

We foresee that the RBNZ will go for further rate cuts to counter deflationary pressure if inflation fails to revive, which is way below the target range of the central bank.

Moreover, the New Zealand second quarter consumer price index rose 0.4 percent q/q, lower than the market expectation of 0.5 percent, as compared to 0.2 percent in the previous quarter. On an annual basis, it rose 0.4 percent y/y, against market consensus of 0.5 percent, from 0.4 percent during a year ago period.

“We now expect an OCR cut in August, with the RBNZ signalling that further monetary policy easing is in the offering to offset the deflationary impact of TWI strength, and that the housing boom will primarily be dealt with via macro-prudential policy,” said ANZ economists in a research note.

In terms of data released today, the New Zealand June trade recorded a surplus of 127 million, against market consensus of 150 million surpluses, as compared to 348 million, revised from 358 million in May. Individually, exports fell to 4.26 billion, a bit higher than the market expectations of 4.22 billion, versus 4.56 billion, revised from 4.57 billion in May. Further, imports fell to 4.13 billion, against market expectation of 4.13 billion, as compared to 4.21 billion in May, revised from 4.22 billion.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 7 points to 7,310.39.