Bonds stabilize, RBNZ goes prudential

Bonds continues to drop on Tuesday then promptly reversed and that capped euro gains. The Australian dollar was the top performer while the US dollar lagged. Early in Asia-Pacific trading, the RBNZ announced curbs on home lending in Auckland, we look at what it means.

Bonds continue to be the driver throughout markets, led by the bund where yields rose to 0.74% before falling back to 0.67%. The euro crested at 1.1282 and then sagged with yields back to 1.1215.

Economic news was light. Greece made its payment to the IMF, taking the drama there off the frontburner. In the US, the JOLTS report slipped to 4994K compared to 5108K expected, underscoring the jobs slowdown in March. That was balanced by hawkish comments from the Fed's Williams who said he preferred raising rates 'a bit earlier' and said he was more confident in inflation returning to 2%.

In early Asia-Pacific trading, the RBNZ released the financial stability report and introduced tougher mortgage rules in the capital effective in October. The accompanying statement referred, once again, to the NZD trading “above its sustainable level.” But the kiwi rallied because it didn't include the previous reference to NZD strength being “unjustified.”

Our take is that the targeted measures relating to the housing market give the RBNZ breathing room to cut rates without fear of stoking overvaluation in Auckland housing. NZD/USD rallied to 0.7400 from 0.7350 but we see this as a sign that a rate cut is likely. Combined with the possibility of more bond market volatility; the kiwi remains vulnerable.

Looking ahead, RBNZ Governor Wheeler appears in Parliament at 0110 GMT. In other central bank news, the BOJ's Sato speaks at 0245 GMT.