Markets brace for rate cuts
Last week was quiet in terms of economic data but highly volatile for rates and currency markets.
Kiwibank economists Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured above, from left to right) described the situation, saying: “Grab the reins and hold on tight. That’s how the past week has felt as rates continue their race lower.”
Sharp decline in swap rates
The two-year swap rate fell another 15 basis points last week, hitting a low of 4.19%. This marks the lowest it has traded in nearly two years, down from a recent peak of over 5.2% and last year’s surge to 5.85%.
Market pricing is now anticipating RBNZ rate cuts, with traders pricing 14 basis points of cuts in August, indicating a 55% chance of a rate cut soon.
Future rate cut expectations
Traders have priced in more than 75 basis points of cuts by November, equating to three cuts.
“The Kiwi economy needs rate cuts,” the Kiwibank economists said. “The data in recent weeks has significantly softened.”
However, they cautioned that what the economy needs and what RBNZ will do are two different stories. They predict the earliest rate cut could be in November, pending confirmation of inflation within the RBNZ’s 1-3% target band.
Comments from Kiwibank traders
In the rates market, Kiwibank traders described the environment as “choppy waters.”
“NZ pricing is in favour of early cuts. There are -78 basis points of cuts priced by November,” one trader said.
“There are sequential -25 basis point cuts priced into NZ starting in August, and a small chance of a -50-basis point at one meeting,” another said.
Currency market volatility
Yen was the main driver of volatility last week.
“Last week a perfect storm of factors came into play, that saw the Kiwi dollar pummelled lower by the end of the week,” Kiwibank trader Mieneke Perniskie said.
The Kiwi dollar ended at a low of 0.5883 on Friday, driven by global trader bets on Federal Reserve rate cuts and the unwinding of Yen carry trades.
Impact of global central banks
The financial markets are also closely watching the US Federal Reserve, Bank of England, and Bank of Japan for their latest policy decisions this week.
Kiwibank experts noted the potential for further volatility depending on these central banks’ actions.
“Ahead of the FOMC meeting this week the market has moved to price in a 100% chance of a -25-basis point cut in September,” Ross Weston, head of balance sheet – Treasury, said.
With significant cuts already priced in, any deviation from expectations by RBNZ could lead to further market volatility.
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