New Zealand bonds close lower as trade deficit narrows in November, Q3 GDP in focus

The New Zealand government bonds closed lower Wednesday after recent data showed that the country’s trade deficit narrowed in November. Also, markets awaited the delayed third-quarter gross domestic product (GDP), which was postponed because of powerful earthquakes last month.

The yield on the benchmark 10-year bond, which moves inversely to its price, closed 1 basis point higher at 3.46 percent, the yield on 7-year note ended up 2 basis points to 3.04 percent and the yield on short-term 2-year note rose 2-1/2 basis points at 2.32 percent.

New Zealand’s trade deficit improved in November to 705 million, down from 846 million the month before. Individually, exports fell 11.7 percent m/m seasonally adjusted, reversing the strength seen in October and imports tumbled by 9.0 percent m/m (sa).

It is worth noting that the Statistics New Zealand will release its third-quarter gross domestic product (GDP) figures for the country on Wednesday by 21:45 GMT. We foresee that for the quarter, it is expected to remain steady at 0.9 percent q/q and for annual basis, it is likely to increase slightly 3.7 percent y/y, from previous 3.6 percent y/y.

Moreover, the Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range last Wednesday, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

Last week, Bill English has been elected by the National Party as the new Prime Minister of the country, with Paula Bennett being sworn-in as his deputy. The new PM will join office post-Christmas; however, there has been no decision yet over the appointment of the new Finance Minister.

In addition, the Reserve Bank of New Zealand Governor Graeme Wheeler in its recent speech said that the interest rates are probably low enough to return inflation to his 2 percent goal amid a robust economic expansion. He said the exchange rate is higher than the economic fundamentals would suggest is appropriate, but the global forces that have boosted the kiwi dollar may be abating.

Wheeler also reiterated that the bank remains concerned about the booming housing market, which has been fuelled by record-low borrowing costs. House-price inflation is much higher than desirable and poses concerns for financial stability.

Lastly, we foresee that the bond prices will keep drifting between small gains and losses in quiet trading due to a long Christmas holiday.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 13.09 points to 6,802.76. While at 05:00 GMT, the FxWirePro's Hourly New Zealand Dollar Strength Index remained highly bearish for a fifth straight day at -148.45 (lower than -75 represent a bearish trend).