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23 May 2014
First, a significant decline in NZ swaps - BNZ
FXStreet (Guatemala) - Kymberly Martin, Senior Market Strategist at BNZ noted that there has been a significant pull-back in NZ swaps in recent months.
Key Quotes:
“There have been multiple influences at work. At the short-end, the market has ratcheted down expectations for future OCR hikes. The RBNZ has indicated the stubbornly high NZD could cause it to temper the near-term pace of rate hikes. In addition, the steady decline in longer-dated US Treasury yields has caused longer-dated NZ swaps to decline”.
“In earlier months when NZ swaps were notably higher than today, we had argued that there was no longer compelling ‘value’ in hedging at such levels. Therefore, some borrowers felt they might have ‘missed the boat’. However, markets have handed out a reprieve. We are now in a situation where 3-year and 5-year swap are 25bps and 35bps respectively below recent peaks. 10-year swap meanwhile is around 55bps below December highs”.
“We now believe the market seriously under-estimates the OCR hiking cycle. It prices only 125bps of hikes over the next two years. i.e. that the OCR will only be back at ‘neutral’ (circa 4.25%), 27 months into a tightening cycle, when the economy is expanding well above trend. By contrast, we see the OCR at 5.00% by the end of next year. The RBNZ in its last published MPS saw the OCR at 5.00% by two years’ time”.
Key Quotes:
“There have been multiple influences at work. At the short-end, the market has ratcheted down expectations for future OCR hikes. The RBNZ has indicated the stubbornly high NZD could cause it to temper the near-term pace of rate hikes. In addition, the steady decline in longer-dated US Treasury yields has caused longer-dated NZ swaps to decline”.
“In earlier months when NZ swaps were notably higher than today, we had argued that there was no longer compelling ‘value’ in hedging at such levels. Therefore, some borrowers felt they might have ‘missed the boat’. However, markets have handed out a reprieve. We are now in a situation where 3-year and 5-year swap are 25bps and 35bps respectively below recent peaks. 10-year swap meanwhile is around 55bps below December highs”.
“We now believe the market seriously under-estimates the OCR hiking cycle. It prices only 125bps of hikes over the next two years. i.e. that the OCR will only be back at ‘neutral’ (circa 4.25%), 27 months into a tightening cycle, when the economy is expanding well above trend. By contrast, we see the OCR at 5.00% by the end of next year. The RBNZ in its last published MPS saw the OCR at 5.00% by two years’ time”.