BONDS: NZGBS: Bear-Steepening Driven By Global Factors

The Japanese Ministry of Finance (MoF) sells Y 1,963.2bn 10-Year JGBs:

• Average Yield: 1.260% (prev. 1.140%)
• Average Price: 99.47 (prev. 100.53)
• High Yield: 1.263% (prev. 1.141%)
• Low price: 99.44 (prev. 100.52)
• % Allotted At High Yield: 37.1592% (prev. 91.7315%)
• Bid/Cover: 3.1809x (prev. 3.3570x)

The market has over a 90% chance of a rate cut at the RBA’s February 18 meeting and between three and four cuts by December, whereas in November this was closer to two. When we update our simple policy reaction function for Q4 CPI & OCR and Q3 GDP data, it continues to imply that rates need to be a bit higher to be in line with economic fundamentals using the RBA’s November projections but the end-2025 rate is 10bp lower than our November estimate.

• Our OCR calculations are 10bp lower than the November run across the horizon to Q2 2026 but the model still has 25bp of cumulative tightening over the four quarters to Q1 2026.
• The model includes the gap between the trimmed mean and the mid-point of the RBA’s target band. Since in November the RBA didn’t expect underlying inflation to reach 2.5% until end-2026, the equation doesn’t signal any monetary easing. It is forward looking including the inflation gap one quarter ahead.
• The contemporaneous output gap is also in the equation but doesn’t go negative enough to offset the positive inflation gap.
• We will update it again with the RBA’s new forecast set published with the February decision.
• It is worth noting that econometric analysis is just an estimate and not a forecast. 

Australia RBA policy reaction function with trimmed mean

USD/CNH has been drifting lower, last back near recent lows close to 7.3000. The pair found selling interest above 7.3200 in earlier dealings. This also puts us back close to the 20-day EMA support zone for the pair. At the margin, CNH is outperforming slightly softer trends for the majors against the USD. Some support is likely from the strong Hong Kong equity rise, up close to 3% at this stage, while the HS China Enterprise index is up over 3.6%. 

• Focus remains on the upcoming tariff deadline. On Monday, Trump stated talks between the two sides would take place over the next 24 hours, raising hopes of delay in implementation (like Mexico and Canada) received. Trump also remarked they have received great interest in TikTok, (which may also be a factor into part of any deal).
• If we see USD/CNH break down through 7.3000, we have the 50-day EMA in the 7.2860/65 region as the next potential downside target.