Dollar funding eases further

With hours to go before New Zealand's central bank announces a monetary policy review, money markets were still pricing in a far smaller interest rate cut than most economists are forecasting. Economists attach a nearly 60 percent probability to the Reserve Bank of New Zealand taking its overnight cash rate down to 2.5 percent from 3 percent, when it announces a decision on Thursday.
But overnight indexed swaps were quoted at 2.69 percent for one-month, implying an easing of 33 basis points. The uncertainty over how far rates will be cut has arisen over the past month and after central bank Governor Alan Bollard tried to quell a rise in market yields driven by the view the monetary authorities were keen to preserve New Zealand's yield differentials in order to attract foreign capital.
Coming against a backdrop of some improvements in New Zealand economic data, those dovish statements from the central bank put markets in a fix. "This is a case where the market is less confident about them going 50 than economists are," said David Plank, head of research at Deutsche Bank in Sydney.
Meanwhile, dollar funding markets in Asia showed no sign of the anxiety over which US banks might need more capital and what next week's report on the stress tests the government is conducting on the largest banks will reveal. Even eurodollar futures were lower in Asia, back from a spike on Tuesday after reports Citigroup would need more capital and that regulators had told Bank of America it may need to raise billions of more dollars in capital.
As fears over a possible swine flu outbreak subsided, and riskier assets such as stock markets and the Aussie dollar rose, dollar swap spreads also narrowed. December eurodollar futures fell to 98.73 from a 98.815 high on Tuesday, driving implied 3-month LIBOR down to 1.27 percent.
Dollar funding rates in Singapore crept down to 1.0375 percent from 1.05 percent on Tuesday, inching closer to the 1 percent mark. The spread between LIBOR and overnight-indexed swaps (OIS), the latter a measure of market expectation of policy rates, was steady around 84 basis points, levels last seen before the collapse of Lehman Brothers in September 2008.