Traders See New Zealand Policy Error Risk in Rate-Hike Bet
(Bloomberg) — Swap traders are bracing for a possible interest-rate increase by the Reserve Bank of New Zealand in the coming months — a move they say will be rapidly unwound.
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Overnight indexed swap contracts are pricing in about a 50% chance RBNZ Governor Adrian Orr will lift the cash rate by a quarter point to 5.75% in the first half of the year. Policymakers will undo any such hike by August, before lowering borrowing costs to 5.25% at the final meeting of 2024, the contracts show.
The swaps pricing points to the risk of a policy error by the RBNZ and underscores the difficulties that markets face in trying to gauge the outlook as the global tightening cycle peaks. Citigroup Inc. has warned that US investors should prepare for the possibility of a very brief easing cycle followed by rate increases shortly thereafter.
“If the RBNZ does choose to hike further from this point, they will definitely be increasing the risk of a hard landing,” said Andrew Ticehurst, a rates strategist for Nomura Holdings Inc. in Sydney. “The RBNZ would almost welcome a rise in unemployment as it would increase its confidence that it will be able to hit its inflation objective, while the same thing would bother the Federal Reserve.”
Traders had priced in a better than 60% chance of an RBNZ hike before data on Tuesday showed New Zealand inflation expectations sank to a 2-1/2-year low this quarter. The local dollar dropped as much as 0.6% to 60.96 US cents.
Talk of a New Zealand rate hike gained momentum after ANZ Bank economists last week forecast the central bank would increase rates twice this year. A smaller-than-expected rise in the jobless rate would be a key trigger, they said.
Over in the US, rates traders have slashed wagers on a March rate cut from the Fed to a roughly 10% chance, after fully pricing in one at end-2023, amid signs that the US economy is holding up better than expected.
(Updates rate-hike odds in second paragraph, adds inflation expectations and currency move in fifth paragraph)
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