15 Mar 2016
NZD: RBNZ monetary policy outlook – Westpac
Imre Speizer, Senior Market Strategist at Westpac, suggests that the RBNZ’s MPS, which surprised the market by cutting the OCR earlier than expected, signalled one more rate to take the OCR to a terminal low of 2.0%.
Key Quotes
“The MPS did discuss downside risks (mainly global shocks) and an upside risk (a heated NZ housing market), but barring surprises it appears 2.0% will indeed be the low. The timing of that final cut is likely to be in either April or June. That much is fully priced by markets, such that surprises are now required to shift pricing materially.
Swap Yield Outlook:
1 week: After reaching a record low at 2.25% last week, 2yr swap rates are now likely to range between there and 2.37%. It will require a major surprise to current expectations to jolt the 2yr out of this range.
3 months: Should settle around 2.20%, based on a terminal OCR of 2.0% and a risk premium of 20bp. A genuine indication of core inflation will be the Q1 print in April, a low outturn likely to catalyse the RBNZ in cutting again as planned.
1 year: Our macro-economic forecast sees the 2yr at 2.20% in a year’s time, assuming the OCR is at 2.0% by then.
Swap Curve Outlook:
1 week: The NZ curve has resumed its multi-year steepening trend, the 2-10yr swap curve targeting 80bp during the next few weeks. The main catalysts are the RBNZ easing cycle, and
expectations the US FOMC will increase rates. The NZ 2yr is now fairly well anchored by the OCR, while the long end will move with global (mainly US) events.
3 months: Multi-month, the case for NZ curve steepening is based on the RBNZ easing (pushing NZ short rates lower) and the Fed tightening (pushing US long rates higher). Those should combine to steepen the NZ 2-10yr towards its fair value of 100bp.
1 year: Our macro-economic forecast sees the 2-10yr beyond 100bp in a year’s time, based mainly on a lower OCR and higher US Fed Funds rate.”
Key Quotes
“The MPS did discuss downside risks (mainly global shocks) and an upside risk (a heated NZ housing market), but barring surprises it appears 2.0% will indeed be the low. The timing of that final cut is likely to be in either April or June. That much is fully priced by markets, such that surprises are now required to shift pricing materially.
Swap Yield Outlook:
1 week: After reaching a record low at 2.25% last week, 2yr swap rates are now likely to range between there and 2.37%. It will require a major surprise to current expectations to jolt the 2yr out of this range.
3 months: Should settle around 2.20%, based on a terminal OCR of 2.0% and a risk premium of 20bp. A genuine indication of core inflation will be the Q1 print in April, a low outturn likely to catalyse the RBNZ in cutting again as planned.
1 year: Our macro-economic forecast sees the 2yr at 2.20% in a year’s time, assuming the OCR is at 2.0% by then.
Swap Curve Outlook:
1 week: The NZ curve has resumed its multi-year steepening trend, the 2-10yr swap curve targeting 80bp during the next few weeks. The main catalysts are the RBNZ easing cycle, and
expectations the US FOMC will increase rates. The NZ 2yr is now fairly well anchored by the OCR, while the long end will move with global (mainly US) events.
3 months: Multi-month, the case for NZ curve steepening is based on the RBNZ easing (pushing NZ short rates lower) and the Fed tightening (pushing US long rates higher). Those should combine to steepen the NZ 2-10yr towards its fair value of 100bp.
1 year: Our macro-economic forecast sees the 2-10yr beyond 100bp in a year’s time, based mainly on a lower OCR and higher US Fed Funds rate.”