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The New Zealand government bonds jumped at the time of closing Wednesday ahead of the Reserve Bank of New Zealand’s (RBNZ) first monetary policy decision of 2017, scheduled to be held on Thursday. However, investors have largely shrugged off the sharp rise in dairy prices at the GlobalDairyTrade auction held late yesterday.
The yield on the benchmark 10-year bond, which moves inversely to its price, plunged 5-1/2 basis points to 3.28 percent at the time of closing, the yield on 7-year note also slumped over 5 basis points to 2.90 percent and the yield on short-term 2-year note traded 3-1/2 basis points lower at 2.24 percent.
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.
In contrast, dairy prices have found some stability over the past month. In last night’s GlobalDairyTrade auction, prices rose 1.3 percent following the 0.6 percent gain in the previous auction. After falling away a bit through December, buyer interest out of China has improved this year. The fact that it held up in this auction that coincided with the Chinese New Year, provides a positive signal for demand ahead.
Tight global supply remains an important factor underpinning prices at these levels, with production in most major exporting regions continuing to decline on a year-on-year basis. But production should begin to stabilize in the coming months, and this would see some pressure come off prices.
Lastly, markets will now await the comments from the RBNZ Governor Graeme Wheeler post the monetary policy statement, for further direction in the bond market.
Meanwhile, the New Zealand’s benchmark S&P/NZX 50 Index closed 0.01 percent lower at 7,066.27, while at 05:00 GMT, the FxWirePro's Hourly NZD Strength Index remained neutral at 20.60 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex
