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26 Apr 2016
NZD: Only 30% chance of a RBNZ rate cut on Thursday - Westpac
Imre Speizer, Senior Market Strategist at Westpac, suggests that the market pricing for the OCR low has been stable for the past two weeks, implying the cycle low for the OCR will be 1.88%.
Key Quotes
“That implies the market sees around a 50% chance the OCR will fall below 2.0% to 1.75% by early 2017.
The main market focus for this week, though, is whether the RBNZ cuts on Thursday or waits until June. A few weeks ago, chances of an April cut were seen as high as 50%, in the wake of a sharp rise in the NZD and a pessimistic reassessment of the Fed’s next rate hike. Since then, we have seen strong NZ housing data, a slightly stronger than expected non-tradeables CPI, and a slightly lower NZD TWI. The market currently assigns only a 30% chance of a cut on Thursday.
Swap Yield Outlook
1 week: We expect the 2yr to range between 2.15% and 2.30% ahead of the 28 April OCR Review. The chances of an April cut have receded, but June remains likely so that the 2yr should be capped by 2.30% (2% OCR plus a maximum 30bp premium). If the RBNZ cuts on Thu, the 2yr should fall by around 15bp. If it remains on hold but signals the cut will be in June, then the 2yr should be little changed since that is the scenario most expect.
3 months: Our cycle low range of 2.10%-2.20% is based on a terminal OCR of 2.0% and a risk premium of 10bp-20bp. CPI inflation for Q1 was in line with RBNZ forecasts, which means that all else equal, the RBNZ should cut to 2.0% as it projected in March, and that cut could occur in June. Indeed, there is a decent chance the RBNZ leaves the door open to a sub-2.0% OCR, which means the 2yr could fall below 2.15% eventually.
1 year: Our macro-economic forecast sees the 2yr at 2.10% in a year’s time, assuming the OCR is at 2.0% by then.”
Key Quotes
“That implies the market sees around a 50% chance the OCR will fall below 2.0% to 1.75% by early 2017.
The main market focus for this week, though, is whether the RBNZ cuts on Thursday or waits until June. A few weeks ago, chances of an April cut were seen as high as 50%, in the wake of a sharp rise in the NZD and a pessimistic reassessment of the Fed’s next rate hike. Since then, we have seen strong NZ housing data, a slightly stronger than expected non-tradeables CPI, and a slightly lower NZD TWI. The market currently assigns only a 30% chance of a cut on Thursday.
Swap Yield Outlook
1 week: We expect the 2yr to range between 2.15% and 2.30% ahead of the 28 April OCR Review. The chances of an April cut have receded, but June remains likely so that the 2yr should be capped by 2.30% (2% OCR plus a maximum 30bp premium). If the RBNZ cuts on Thu, the 2yr should fall by around 15bp. If it remains on hold but signals the cut will be in June, then the 2yr should be little changed since that is the scenario most expect.
3 months: Our cycle low range of 2.10%-2.20% is based on a terminal OCR of 2.0% and a risk premium of 10bp-20bp. CPI inflation for Q1 was in line with RBNZ forecasts, which means that all else equal, the RBNZ should cut to 2.0% as it projected in March, and that cut could occur in June. Indeed, there is a decent chance the RBNZ leaves the door open to a sub-2.0% OCR, which means the 2yr could fall below 2.15% eventually.
1 year: Our macro-economic forecast sees the 2yr at 2.10% in a year’s time, assuming the OCR is at 2.0% by then.”