New Zealand's money markets did a quick about-turn on Thursday, pricing in rate cuts in June and July and for rates to stay low into 2010 after the central bank pledged to keep rates low until the latter half of 2010.
New Zealand's pledge came hours after the US Federal Reserve kept its near-zero rates steady and also vowed to keep rates down for a long time.
Dollar funding costs in Asia crept down further as stock markets rallied and risk appetites got a boost from some of the Fed's optimism about the economy, barring a brief bout of anxiety on news reports that struggling US carmaker Chrysler was almost certain to file for bankruptcy.
The Reserve Bank of New Zealand cuts its cash rate to 2.5 percent from 3 percent, in line with expectations of a majority of economists. Money markets had priced in far less easing, and hence reacted to the news by pushing interest rate swaps lower and the curve steeper. Two-year swaps fell nearly 30 basis points (bps) to 3.32 percent.
But markets were more surprised by the RBNZ statement, which said the overnight cash rate (OCR) could fall further in coming months. The bank also pledged to keep rates low for more than a year, just as the Bank of Canada and Sweden's Riksbank have done.
Imre Speizer, senior markets strategist at Westpac Bank, said the statement was both unusual and significant. "They explicitly put an end date for the bottom of the OCR. That adds a lot of credibility to the statement. One-month OIS was quoted at 2.605 percent while the 2-month OIS was at 2.49 percent.
The drop in short-term rates caused the swaps curve to steepen, with the spread between 5 and 2-year swaps going to 121 bps from 115 on Wednesday. Speizer said the overnight indexed swaps suggested markets were discounting a near 18 basis points easing in the policy rate in June, followed by a further drop in that rate to a trough of 2.22 percent in July.
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 on the largest banks will reveal. Dollar funding rates in Singapore crept down to 1.02357 percent from 1.0375 percent on Wednesday, inching closer to the 1 percent mark.