- Kiwi wholesale interest rates have collapsed. Traders, many of them offshore, are placing massive bets on RBNZ easing, as early as August.
- We agree with market sentiment. Because we see the need for rates relief now, not later. If we were setting policy, we would have cut already. But for August, we’d cut 25bps, and signal 25bps at every meeting thereafter. And we’d highlight the potential use of 50bp moves, data dependent.
- At this stage, we don’t see the RBNZ buckling fast enough to do what’s needed (yet). Even though we think they should cut, we think it’s a step too far for the RBNZ. Following May’s massive misstep, August will be a complete about face, leaving many within the RBNZ with sprained ankles. We think they will lower all their forecasts and signal rate cuts by year end, rather than late in 2025.
Grab the reins and hold on tight. That’s how the past week has felt as rates continue their race lower. After already falling a massive 47bps in the past 2 weeks, the pivotal 2-year swap rate rallied a further 15bp just last week. Hitting a low of 4.19%, it’s the lowest the 2-yr has traded in just under two years. And it’s well below its recent peak of over 5.2%, and last year’s surge to 5.85%.
It comes as market pricing continues to run rampant in anticipation of RBNZ rate cuts. Market traders are now pricing 14bps of cuts in August. That’s a 55% chance of a rate cut in just a couple weeks’ time. And looking ahead, traders have priced in just over 75bps of cuts by November. That’s a whopping 3 cuts (see the Charts of the Week).
We get it. The Kiwi economy needs rate cuts. The data in recent weeks has significantly softened. Another contraction in the June quarter looks increasingly likely. But what the Kiwi economy needs, and what we think the RBNZ will do are two different stories right now. Too many cuts are priced in for 2024. Traders, as they often do, are jumping the gun.
If the RBNZ favours seeing official confirmation that inflation is back within it’s 1-3% target band, then November is the earliest kick-off date for rate cuts. Because we see this box being ticked by the next print released in mid-October. Our current call remains a 25bp cut in November. Risks however are strongly skewed to an earlier move. The weakness in the data as of late has definitely been playing on our minds. And no doubt the RBNZ’s too. We do think there is a case where weaker than expected data – whether that be the upcoming employment, GDP, or QSBO reports – could tip the scale towards a cut in October. Because such outturns should be confirmation in itself that inflation will fall below 3% in the September (current) quarter. August would be too early for the RBNZ, and quite the 180° move – to go from signalling a rate hike in May to cutting well ahead of expectations. The debate on timing will continue as more data comes to light. And more volatility is to come as the RBNZ likely under-delivers on (currently) over -priced market expectations.
In the meantime, we’ll be watching the US Fed, Bank of England, and Bank of Japan. All three central banks are expected to announce their latest policy decisions this week. And a hold (Fed), cut (BoE) and hike (BoJ) are on the cards. Gear up for another busy week ahead.
Financial markets
The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.
In rates, it’s choppy waters
“Just when you thought it was safe to go back in the water. The NZ rates markets initially exhibited signs of consolidation this time last week, since then short end yields have fallen another -15bp and terminal rate pricing fallen to 3.25% by mid-2026. Most of the RBNZ cuts are priced over the next year, 7 meetings and -25bp cuts at each is the basic formula i.e. 175bp of cuts over the next year. The Bank of Canada potentially writing a play book here, a base rate of 5.00% a couple of months ago to 4.50% now with a 3.00% base rate priced by Q3 2025. However, Canadian CPI was at 2.70% before they cut from 5.00% so that playbook arguably a future state for NZ. That overhang coupled with worries about next week’s employment report being soft and persistent receive side flow in the short end (2yr) too much for the NZ rates market to handle.
NZ pricing is in favour of early cuts. There are -78bp of cuts priced by November, the starting point of August or October is up for debate, regardless October has -38bp of cuts priced. It would be a whipsaw like pivot from the RBNZ if it were to cut in August. The bank was forecasting a hike back in May and to be cutting 3 months later is some turn. However, it’s not without justification. We have not had huge amount of NZ data but what we have had has had eye watering falls (PMI, House Sales, PSI, CPI, Trade Balance). Sure, fixed mortgage rates have fallen but that transmission takes time, if immediate action is needed then floating rates need to fall.
There are sequential -25bp cuts priced into NZ starting in August, and a small chance of a -50bp at one meeting. This does suggest room for disappointment, i.e. if they cut early (Aug or Oct) then potentially less to do later vs. if they forecast a cut later (i.e. November) then cuts get moved out and short end rises (1y).
Ahead of the FOMC meeting this week the market has moved to priced in a 100% chance of a -25bp cut in September. Unlike NZ the US rates market expects a clear signal of a cut before they go, i.e. NZ has -17bp of cuts in August without a firm RBNZ steer. However, like NZ pricing there are a lot of cuts priced with -137bp of cuts priced by June 2025, NZ have around -183bp priced to July 2025. That recipe creates an issue for the TWI, it starts to sink like a stone. Low TWI increases tradable inflation and the great central bank circular reference begins.” Ross Weston, Head of Balance Sheet – Treasury.
In currencies, Yen was the main driver of volatility last week, and will be for the week ahead
“Last week a perfect storm of factors came into play, that saw the Kiwi dollar pummelled lower by the end of the week. After opening the week at 0.6010, the Kiwi managed a pop higher to 0.6027. From there, a bout of risk aversion, with lower commodity prices and a selloff in equities, the Kiwi started to slip lower. Mid-week a flurry of Yen buying as carry trades were unwound, saw the Kiwi slide quickly to an initial low of 0.5918. Also through the week, traders globally continued to increase their bets on Federal Reserve rate cuts. Closer to home, yields were lower across the week, with traders now starting to call for a likely cut from the RBNZ in October, with some chance of cuts priced in as early as August. Add this rhetoric to the Yen carry trade unwind, and there was little to provide support for both the Kiwi and Aussie dollars. As the week wore on, the Kiwi ended up hitting a low on Friday of 0.5883. At these levels the Kiwi looked pretty oversold with the RSI (relative strength indicator) hitting 26.5. On Friday market participants appeared to take a pause ahead of the US PCE data that was released on Friday night. The PCE data was good, in line with a continued deceleration in inflation for the US. This week there are plenty of data points for potential further currency volatility. We have the Fed’s FOMC decision, and also we hear from the Bank of Japan and the Bank of England with rate decisions. There is a lot of potential for further Yen movements (in either direction) with the BoJ this week. If they don’t hike, there will likely be a big sell off in the Yen. NZDAUD has broadly traded close to the 0.9000 level, with a short lived boost higher to 0.9060 last week, on the back of some weak data out of China. Both the Kiwi and Aussie dollars have fallen victim in the last week to the Yen carry trade unwind, and lower commodity prices.” Mieneke Perniskie, Trader - Financial Markets.
What to watch in the week ahead. See the calendar for more
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