NZ bonds likely to rise as RBNZ's stance unclear

The New Zealand government bonds are expected to strengthen as investors remain cautious ahead of the RBNZ policy meet on Thursday. It remains a close call between unchanged rates of 2.25 percent or a cut to 2.00 percent. Today, New Zealand markets will remain closed on account of the Queen's birthday, trading activity will resume on Tuesday.

On Friday, the yield on the benchmark 10-year bonds, which moves inversely to its price fell 3 basis points to 2.635 percent and the yield on short-term 2-year bonds dipped 2-1/2 basis points to 2.090 percent.

The Reserve Bank of New Zealand interest rate decision is due on Thursday, 9th June (Wednesday 21:00 GMT) although investors are pricing a 20 percent chance of a rate cut. We foresee that the Reserve Bank of New Zealand (RBNZ) is widely expected to leave the Official Cash Rate at its record low of 2.25 percent, after having cut 25 basis points. Even so, we expect the RBNZ to adopt a stronger easing bias, signalling further rate cuts ahead (albeit conditional on the data).

The May ANZ commodity price index rose 1.0 percent from -0.8 percent in April. However, on a y/y basis the index is down 11.7 percent. Moreover, New Zealand Q1 building work rose 5.3 percent q/q, against market consensus of 1.0 percent, marking the biggest Q1 rise for two years.

In the first quarter of the year, the RBNZ was concerned with weakness in the global dairy trade (GDT), but recent figures have shown improvement with the GDT auction prices rising 3.4 percent in the June 1st reading, after having already gained 2.6 percent in the prior release. Five out of the past six auctions have seen an increase in prices.

Lastly, we foresee the RBNZ cutting rate in June to around two percent is less likely, but expectations of a rate cut in August remains on. The Central bank may act on the housing market if they cut any further. However, the bank has not signalled any cut in the next policy meet in June, retaining its easing bias.