NZD/USD inter-market: further widening of US-NZ 10-yr yield spread likely on US data

New Zealand dollar (NZD) has been offered heavily across the board ever since it topped out at a high of 0.7325 levels on July 12. A technical correction gathered pace and ended up being a sell-off after New Zealand CPI missed estimate earlier this week.

RBNZ then announced tighter loan restrictions, which was read by markets as an indication the central bank could cut rates in August. Meanwhile, a rise in milk powder prices at GDT auction failed to support Kiwi.

Today’s sell-off was triggered by RBNZ’s economic assessment report, which showed the central bank is on the verge of reducing rates in August.

Yield spread has largely priced-in RBNZ rate cut

With RBNZ expressly calling for more easing in August via its economic assessment report, the US-NZ 10-year yield spread may widen further in the next few days. However, talk of RBNZ rate cut has been doing the rounds since first week of the current month. The yield spread began widening since July 8, which means RBNZ rate cut may have been priced-in to a greater extent by the markets. The spread stood at -0.92 on August 8 and currently hovers around -0.69.

Spread may widen further on US data

US August non-farm payrolls and wage growth numbers will hit the wires on 5th August i.e. well ahead of RBNZ rate decision scheduled on August 11. Furthermore, the next GlobalDairyTrade (GDT) auction is scheduled on August 2. Dairy market commentators see moderation in dairy prices amid high supply.

Consequently, there is ample scope for further widening of the yield spread in favor of US dollar if the payrolls figure and wage growth figure is strong.

Kiwi traders should note that RBNZ rate cut is likely to be priced-in well ahead of the rate decision on August 11. This will become clear via yield spread chart. In such a case, NZD could snap back if RBNZ indeed cuts rates as expected.