MONEY MARKETS-NZ rates rebound, some see lingering uncertainties

* New Zealand money rates rebound to pre-quake levels

* Some analysts see market move overdone

* NZD 1Y1Y forwards, 2Y swaps may offer opportunities

By Richard Leong

HONG KONG, March 25 – Traders renewed bets this week that
New Zealand’s central bank will raise interest rates in the next
12 months after briefly reducing them on concerns over Japan’s
massive earthquake on the country’s economy.

Money market rates in New Zealand and other major economies
have returned to levels prior to the devastating disaster that
hit Japan on March 11 as economists expect a limited impact on
global economic activity and central bank policies.

On Friday, local money rates implied traders have priced in
40 basis points of increase in the Reserve Bank of New Zealand’s
policy or official cash rate over the next 12 months, according
to Credit Suisse.

The one-year New Zealand swap rate , a gauge of
investor expectations on changes in RBNZ policy, was last quoted
at 2.725 percent after bottoming at 2.648 percent last week. It
has fallen more than 70 basis points since mid-January.

Some analysts, however, reckoned the market reversal may be
premature as it will still take time to tally the quake’s
ultimate toll on New Zealand’s exports.

“It’s a very fluid situation,’ said Michael Turner, RBC
Capital Markets’ fixed income and currency strategist in Sydney.
“It will take three quarters for the traction to take place in
New Zealand.”

On Thursday, the government reported the economy grew 0.2
percent in the last quarter of 2010, slightly stronger than what
economists had predicted. For more, see

Given a still uncertain outlook, analysts said investors can
profit by buying short-dated New Zealand debt securities,
earning above-average yields and additional returns if the
Reserve Bank of New Zealand were to lower interest rates on
signs of a slowdown stemming from the Japanese catastrophe.

Just last week, traders had hoped the RBNZ would respond to
the Japan’s deadly quake and tsunami and ensuing nuclear crisis
with an emergency rate cut.

In February, Christchurch, New Zealand’s second-largest
city, suffered its own deadly quake. This led the RBNZ to slash
its policy rate by 50 basis points to 2.5 percent earlier this
month in an attempt to cushion the economy. See

One profitable trade is to enter into a one-year forward
contract linked to the one-year local swap rate, which offers
fixed-rate cash flows at a current rate of about 3.86 percent,
according to Deutsche Bank’s macro strategist David Plank.

That rate is 1.36 percentage points higher than the central
bank’s current target rate.

At this level and with the RBNZ likely to leave the official
cash rate on hold for some time, the 1Y1Y forward
offers more than 10 basis points a month in
additional yield if one simply holds it to maturity, Plank wrote
in a research note this week.

“At current levels the 1Y1Y rate earns positive roll-down of
more than 10 (bps) per month. In an environment where the RBNZ
has made it clear it is on hold for some time this carry
provides a considerable degree of comfort,” Plank wrote.

Another alternative to a 1Y1Y swap forward is receiving
fixed-rate cash flows at the current rate of 3.29 percent via a
two-year swap contract .

The major downside risk to these trades is that RBNZ might
raise rates sooner than what traders think, RBC’s Turner said.

At least one strategist does not see much value in betting
on New Zealand short-term rates.

“New Zealand rates are fairly priced for now,” said Annette
Beacher, head of Asia-Pac Research with TD Securities in

(Reporting by Richard Leong; Editing by Kim Coghill)

MONEY MARKETS-NZ rates rebound, some see lingering uncertainties