NZD/USD intermarket – Rally in Kiwi contradicts drop in NZ-US 2-yr yield differential

NZD/USD clocked a low of 0.6951 on July 21 before beginning the upward journey to today’s high of 0.7337 levels.

Throughout last one month, the NZ bond markets have been pricing-in a 25 basis point rate cut. This is evident from the 2-yr NZ bond yield, which dropped from 2.09 (July 13 high) to 1.73 (yesterday’s low).

On July 21, the yield was trading at 1.935%, while the spread with US 2-yr treasury yield stood at 1.253. Since then the yield has been declining steadily. The spread dropped to 1.075 today.

This clearly suggests the rally in the NZD/USD pair from July 21 low of 0.6951 contradicts the narrowing of 2-yr yield spread. This raises question whether the pair is overstretched and more vulnerable to spike in US rate hike bets.