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NZD continues to trade well – in trade-weighted terms, it is at a 6m high. RBNZ has been puzzling in recent monetary policies.
The central bank may have cut rates early in December but it had also hinted the easing cycle might be over and that turned what ordinarily would be a currency negative event.
However, The central bank of New Zealand cut its official cash rate by 25bps to 2.25% at its March 2016 meeting.
It is the first cut this year, citing many risks to the outlook, including uncertainties over global growth, particularly around China, the outlook for global financial markets, weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.
Market pricing for the OCR low has shifted slightly lower, from 1.89% to 1.84% currently. That implies the market sees a 56% chance the OCR will fall below 2.0% to 1.75% this year.
The recent rise in the NZD has certainly been one catalyst for the repricing. Regarding the probabilities of a rate cut this month (on the 28th), it has increased from 30% to 40%.
As a result, Swap Yield outlook for 1 week has changed: We see the 2yr sitting in a 2.10%-2.20% range until the Q1 CPI release on 18 April.
But, excluding a surprising shocks from that release, we look forward to the 2yr to then remain in the range until the 28 April RBNZ OCR Review.
The prospects of RBNZ's cut seem more likely than standing pat on it when evaluating these yield curves, but we anticipate no surprises even if the CB remains unchanged as well on the other hand.
Elsewhere, in U.S. the payer spreads at the front end of the curve make some sense, given the post-FOMC bull steepening of the curve.
One can finance the payer spread in the front end by selling a payer in the belly (in the process effectively creating a bearish flattener).
We recommend long 6m2y a/a+15bp payer spread financed by selling a 6m10y payer (a revised +25 bps indicative).
