Research Team at BNZ, suggests that after the RBNZ’s surprise cut the market now prices a further 0.25% OCR cut by August and around a 30% chance that rates need to be cut even further.
“We anticipate a cut to 2.00% in June, but concur with the view that risks are tilted toward the OCR ultimately being cut below 2.00%.
NZ short-end swaps are at historic lows, but in coming months we see these moving even lower. (i) We expect Q1 annual CPI data (due 18 April) to again print not much above zero (0.3%y/y), inspiring further rate cut expectations, especially if inflation expectations continue to head lower. (ii) The dairy sector remains weak and is not compensated by a sustained fall in the NZD. A more dovish Fed today makes achieving a lower NZD even more difficult. (iii) Global risks remain. (iv) As the RBNZ delivers another rate cut the market will likely be inclined to price even more (unless accompanied by a strictly hawkish message from the RBNZ).
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The market currently prices a trough in the OCR of 1.94% by late this year. We expect that pricing may extend to reflect a low on the OCR of 1.75%. On this basis we look to receive NZ 2-year swap above 2.30%, targeting a move down to 2.00%. We would maintain a stop at 2.35%.
Our core view is that the RBNZ cuts its cash rate to meet the RBA’s (2.0%) with risks tilted toward the RBNZ cutting below the RBA. In addition, we anticipate that the RBNZ will keep its cash rate lower for longer than the RBA. This suggests the NZ-AU 2-year spreads may ultimately trade into negative territory as the year progresses.”