New Zealand bonds close higher as RBNZ signals rate cut in its economic assessment report

The New Zealand government bonds closed higher on Thursday as the Reserve Bank of New Zealand much anticipated economic assessment clearly signalled a likely rate cut in the upcoming policy meeting due to strengthening NZ dollar.

The yield on benchmark 10-year bond, which moves inversely to its price, slid 1-1/2 basis points to 2.270 percent, the yield on 7-year note dipped 1 basis point to 2.005 percent and the yield on short-term 2-year note also ended 1 basis point lower at 1.885 percent.

The Reserve Bank of New Zealand in its unscheduled economic outlook update concluded that a further policy easing will be required as depreciation in the exchange rate is needed.

The central bank added the monetary policy will continue to be accommodative and long-term inflation expectations are well anchored. Also, the NZ dollar rate is holding down tradable good inflation and currency markets make it difficult to meet inflation objective.

Lastly, the surprised assessment mentioned that more easing is possibly needed to return inflation to target as many uncertainties hover around the country’s economic outlook.

We foresee that the RBNZ will go for further rate cuts to counter deflationary pressure if inflation fails to revive, which is way below the target range of the central bank.

Moreover, prices in the fourth Global Dairy Trade (GDT) auction of fiscal 2016-17 remained unchanged following a 0.4 percent decline in prices previously. On the other hand, whole milk powder rose 1.9 percent, more than reversing the previous decline, but the weak GDT data will slightly increase the potential for an RBNZ rate cut,

On Monday, the New Zealand second quarter consumer price index rose 0.4 percent q/q, lower than the market expectation of 0.5 percent, as compared to 0.2 percent in the previous quarter. Petrol prices marked the largest upward contribution. Moreover, prices for tradable goods and services rose 0.6 percent, whereas prices for non-tradable goods and services rose 0.3 percent.

On an annual basis, it rose 0.4 percent y/y, against market consensus of 0.5 percent, from 0.4 percent during a year ago period. Lower prices for transport made the main downward contribution. Prices for non-tradable goods and services increased 1.8 percent, whereas prices for tradable goods and services decreased 1.5 percent. In addition, the New Zealand June services PMI slightly fell to 56.7, from 56.9 in May.

In addition, the NZ dollar declined below the 0.7000 handle after Reserve Bank of New Zealand issued a dovish outlook on the economy. The Kiwi trades 0.4 percent lower at 0.6991, attempting to recover from a low of 0.6951, its lowest level in more than 6-weeks. Immediate support is seen at 0.6951 (Session Low), break below could drag it till 0.6900. On the higher side, resistance is located at 0.7021 (Session High), break above targets 0.7059/0.7085.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 41.38 points to 7,214.05.