New Zealand bonds close higher on RBNZ easing hopes

The New Zealand government bonds closed higher on Wednesday as investors had anticipated a further easing from the Reserve Bank of New Zealand (RBNZ) in its upcoming policy meeting in the wake of rising deflationary pressure.

The yield on the benchmark 10-year bond fell 2 basis points to 2.205 percent, the yield on 7-year note also dipped 2-1/2 basis points to 1.950 percent and the yield on short-term 2-year note ended 2-1/2 basis points lower at 1.835 percent.

The central bank is expected to cut its official cash rate by 25 basis points in the upcoming monetary policy meeting, which is scheduled to take place on August 10. Moreover, inflation is likely to stay low for an extended period and since the labour market has lost momentum this year, we speculate a higher possibility for further monetary easing. We also think that the risks of strengthening New Zealand dollar will factor into the decision.

In terms of recent economic data, New Zealand’s July ANZ commodity prices rose 2.0 percent m/m, from higher 3.7 percent in June. In addition, second quarter average hourly earnings rose 0.8 percent q/q, lower than the consensus of 0.9 percent, from 0.3 percent in the previous quarter.

Lastly, in the latest GlobalDairyTrade (GDT) auction world dairy prices have shot higher, with the GDT price index jumping 6.6 percent since the last auction in mid-July, most likely reflecting concerns about tightening supply.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 51.80 points to 7,277.70.