New Zealand bonds end high as investors digest Trump's policy actions; GDT auction in focus

The New Zealand government bonds bounced Tuesday at the time of closing as investors digested the United States President Donald Trump’s aggressive policy actions. However, markets have largely shrugged off the upbeat inflation expectations revealed today.

Also, investors remain focused on the GlobalDairyTrade price auction scheduled to be held on February 7, besides the Reserve Bank of New Zealand’s (RBNZ) first monetary policy decision of 2017 on February 9.

The yield on the benchmark 10-year bond, which moves inversely to its price, plunged 8 basis points to 3.33 percent at the time of closing, the yield on 7-year note also slumped 7 basis points to 2.96 percent and the yield on short-term 2-year note traded 3-1/2 basis points lower at 2.28 percent.

Inflation expectations as measured by the RBNZ's quarterly survey surged in the March quarter rose from 1.68 percent to 1.92 percent, very close to the 2 percent mid-point of the RBNZ’s inflation target range and the highest level since 2014. Expectations for one year ahead, a less crucial indicator to the RBNZ’s policy horizon also rose from 1.29 percent to 1.56 percent.

Dairy prices were broadly stable in last month’s GDT auction. In aggregate, prices rose by 0.6 percent, following previous auction’s 3.5 percent fall. After a 7.7 percent fall December auction, whole milk powder prices were stable, edging 0.1 percent lower to USD3,283/tonne.

Further, buyer interest out of China looks to have improved over the past couple of auctions, after falling away a bit through December. We at FxWirepro continue to foresee slight moderation in dairy prices in the near term.

Also, The RBNZ is widely expected to maintain the official cash rate (OCR) at a historic low of 1.75 percent amid stronger than expected lift in inflation was more broad-based than widely anticipated.

"We expect the Reserve Bank to hold the OCR at 1.75 percent, with a firmly neutral outlook. The RBNZ will take some comfort from the fact that inflation is finally back within the target range. But there are still some significant barriers to a further pickup in inflation from here," said Michael Gordon in Westpac NZ Research note.

Meanwhile, the New Zealand’s benchmark S&P/NZX 50 Index closed 0.39 percent higher at 7,067.05, while at 04:00 GMT, the FxWirePro's Hourly NZD Strength Index remained neutral at 92.05 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex