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25 Feb 2014
Flash: NZ and US 10yr swap rates spreads to narrow short term - Westpac
FXStreet (Bali) - According to Imre Speizer, FX Strategist at Westpac, the spread between NZ and US 10yr swap rates should narrow further in the near term but widen into year end.
Key Quotes
"There is a close relationship between NZ and US term interest rates, such that a one basis point change in the US 10yr swap rate causes a a similar change in the NZ 10yr swap rate. Since US rates bottomed in July 2012 the relationship is such that a 1bp change in the US 10yr causes a 1.1bp change in the NZ 10yr "
"The next month or two should see US rates under further downward pressure. Since the GFC, US economic data surprises have been seasonally negative during the first half of the year and positive during the last quarter. To be sure, US data has been disappointing for a month already, but as our US data surprise model shows (Chart 1b) there is scope for more. The typical duration of the peak-to-trough in our model is four months, but the current cycle is only one month old."
"If US data does indeed disappoint during the months ahead, US 10yr interest rates should respond similarly. In turn, the NZ 10yr rate will fall, and given its beta is greater than one, the spread between the two rates should also decline. We target 210bp (current 222bp)."
"Of course, NZ 10yr rates are also influenced by the OCR, and given a tightening cycle will almost certainly start in March there is an argument for expecting the beta to change. We would agree with that thesis once the RBNZ cycle is well underway and market pricing for the terminal OCR overshoots. In the near term, however, much is priced in already, such that the first hike may elicit little reaction at the long end."
"By year end, though, rising US rates plus the RBNZ factor should combine to take the spread beyond 240bp."
Key Quotes
"There is a close relationship between NZ and US term interest rates, such that a one basis point change in the US 10yr swap rate causes a a similar change in the NZ 10yr swap rate. Since US rates bottomed in July 2012 the relationship is such that a 1bp change in the US 10yr causes a 1.1bp change in the NZ 10yr "
"The next month or two should see US rates under further downward pressure. Since the GFC, US economic data surprises have been seasonally negative during the first half of the year and positive during the last quarter. To be sure, US data has been disappointing for a month already, but as our US data surprise model shows (Chart 1b) there is scope for more. The typical duration of the peak-to-trough in our model is four months, but the current cycle is only one month old."
"If US data does indeed disappoint during the months ahead, US 10yr interest rates should respond similarly. In turn, the NZ 10yr rate will fall, and given its beta is greater than one, the spread between the two rates should also decline. We target 210bp (current 222bp)."
"Of course, NZ 10yr rates are also influenced by the OCR, and given a tightening cycle will almost certainly start in March there is an argument for expecting the beta to change. We would agree with that thesis once the RBNZ cycle is well underway and market pricing for the terminal OCR overshoots. In the near term, however, much is priced in already, such that the first hike may elicit little reaction at the long end."
"By year end, though, rising US rates plus the RBNZ factor should combine to take the spread beyond 240bp."