Data Flash (New Zealand)
NZ no longer an 'island'
Summary
On 7 March we recommended that investors buy NZ short bonds against Australia. Our favoured way to put this trade in
place was to receive 3Y NZD swap and sell the 3Y AUD future.
The slump in NZ business confidence in the March QSBO has dramatically narrowed the "confidence gap" between NZ and
Australia. A significant convergence in short bond yields seems likely and we continue to recommend the trade.
NZ no longer an "island" immune to the global slowdown
Note: For Australia, NAB business conditions are used rather than expectations. The last observation for NZ assumes the
April National Bank survey is in line with the March QSBO.
The NZIER has just reported a significant fall in NZ business confidence. In the Institute's March survey overall
business sentiment has fallen to -2, from a reading of +31 at the end of the December quarter.
Interestingly, the NZIER's survey comes just two weeks after the National Bank's monthly survey reported a high level of
business confidence for March. This indicates that sentiment has reversed very quickly, though the more rural flavour of
the NBNZ survey may affect the comparison somewhat.
The QSBO data has, not surprisingly, prompted the NZ market to fully price in a rate cut by the RBNZ on 19 April. While
a poor outcome for the Q1 CPI may persuade the RBNZ to wait until the May Monetary Policy Statement, the plunge in
sentiment suggests that further rate cuts by the RBNZ are almost certainly a question of when not if.
In contrast, Australian business sentiment has steadied in the last few months as RBA rate cuts provided an offset to
deteriorating global conditions. In fact, the NAB survey reported a small rise in business confidence in March even as
business conditions remained unchanged.
With the gap between NZ and Australian business sentiment narrowing, the interest rate gap between the two countries
should also narrow. Certainly, the RBA's recent statements suggest they could pause for a period. If the RBNZ does ease
in April and/or May the gap between official rates will narrow.
Indeed, spreads have begun to narrow. The gap between the 3Y NZD swap and the 3Y AUD futures has narrowed some 20 bp
since we recommended the trade. We see considerable scope for a further compression in spreads.
David Plank Fixed Income Strategist
This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com
If you would like to be removed from our mailing lists please contact your usual Deutsche Bank representative.