New Zealand's central bank shifts tone, sending Kiwi lower

Markets

A batch of US data turned out mixed yesterday. Strong core capital good shipments (investment proxy) compensated for negatively distorted durable goods orders (Boeing). House prices rose in line with forecasts but consumer confidence unexpectedly retreated on a deteriorating current and six month ahead assessment on the economy and jobs. Second tier business sentiment indicators were unable to settle the debate either, especially with a more important one (manufacturing ISM) scheduled later for release on Friday. US yields whipsawed with net daily changes of -2.6 bps (2-y) to +3.2 bps (30-y) eventually. The $42bn 7-y auction went smoother than Monday’s 5-y but didn’t leave a stamp. German Bunds underperformed. They erased intraday gains to push yields 0.4 to 3.3 bps higher to make the curve slightly less inverse. Equities along with major FX didn’t choose a strong direction. The EuroStoxx50 hit new multiyear highs but Wall Street finished mixed. EUR/USD ended the day slightly weaker at 1.0844, DXY an inch higher. Above-consensus Japanese CPI helped JPY close to nothing. USD/JPY (150.51) closed well above the daily lows.

Drowned Under. The central bank of New Zealand softened its previous threat to lift rates even further (see below), turning the Kiwi dollar into this morning’s biggest underperformer. The Aussie dollar trades on the backfoot as well following (incomplete) monthly CPI figures (January 3.4% vs 3.6% expected). USD takes a lead during mild risk-off. US cash yields ease less than 2 bps and German yields are ready for a lower open as well. Belgium kicks off the CPI bonanza today, be it with a national calculation (instead of the harmonized one). Most of the EU member states (harmonized) CPI readings are due tomorrow (ahead of the euro area figure on Friday), however. In absence of other market-impacting data, it means we may be looking at a quiet trading session with moves being mainly technically inspired. Fed’s Williams (New York), Collins (Boston) and Bostic (Atlanta) hit the wires today. We expect them to repeat Waller’s “what’s the rush” (for cutting rates) in some form or another. The power of repetition brought US money markets more or less in line with the December dot plot (three cuts this year) meanwhile. Core bond yields in any case enjoy a solid floor beneath them. The dollar’s recent correction looks ready for a reversal. Spillovers from Asian equity markets to Europe could help the greenback in the process.

News and views

The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 5.5% this morning. Interest rates need to remain at a restrictive level for a sustained period of time. Annual headline CPI is expected to return to the 1%- 3% target band by Q4 this year and to the 2%-midpoint later in 2025. Risks to the inflation outlook are more balanced than at the time of the November meeting/update. Restrictive monetary policy and lower global growth have contributed to aggregate demand slowing to better match the supply capacity of the NZ economy. High population growth (immigration) still supports aggregate spending and also helps easing capacity constraints in the labour market. Updated forecasts show policy rates (at least) level until Q1 2025 with the probability of an additional hike being slightly lower (5.6% policy rate peak compared to 5.7% in November). OCR projections otherwise barely changed (unaltered 4.9% in Q4 2025; 3.5% from 3.6% in Q4 2026). Annual inflation is expected at 3.8% for the March FY (from 4.3%), 2.6% for FY 2025 (from 2.4%) and 2% for FY 2026 (unchanged). The new growth path is 0.3%-1.2%-2.8% from 1.2%-1.4%-2.8%. NZD swap rates plunge 16 bps (30-yr) to 23 bps (2-yr) this morning as markets now rule out an additional rate hike. The kiwi dollar drops from NZD/USD 0.6170 to 0.6110.

Bank of England deputy governor Ramsden, who oversees financial markets, said that the UK central bank may continue running down its QE portfolio even after hitting the “preferred minimum range of reserves” which it estimates in the range of £335bn to £495bn. The BoE’s asset portfolio declined from a £895bn peak to currently £735bn with Ramsden suggesting that the BoE can wind it down completely should it be necessary. This view contrasts with for example the Fed which wants to maintain a structural bond portfolio to back an ample level of reserves.

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