Tuesday 8 May 2012

Two OCR markets go in...

TVHE makes the case for an RBNZ OCR cut in June. As usual, I look to the markets on this kind of question. Matt points to Credit Suisse, where the odds of a 25 BP move is backed out of OIS markets.

So if I'm reading that right, it's an 81% chance of a 25 BP cut (or a 40.5% chance of a 50 BP, or some mix, unless they've some particularly good way sorting out those kinds of issues).

If you drill down to today's trading, the market there looks less settled, with a trading range of about 51%-81%. Again, take the caveat that I don't know these markets nearly as well as Matt would. If I'm reading that right, the big money markets have better than even odds of an interest rate cut.

Meanwhile, here are the current iPredict odds on no change in the interest rate at the June meeting.

iPredict.co.nz


So Credit Suisse has a 50-81% chance of a cut; iPredict has a 60% chance of no change. Credit Suisse is where the big money plays are tallied; iPredict is more likely to have insiders.

I've done a bit of shorting on the no-change contract and have gone a bit long on the 25 BP cut, just on the basis of the price difference between the two markets. I'm not trading in OIS markets and doubt that iPredict could handle the volumes needed to run an arbitrage play across those; the minimum stake in OIS markets is unlikely to be small enough to make it feasible. And, I don't have a strong feel for which market is going to wind up being right.

It would be awfully fun to go back through all of the closed iPredict contracts to see whether they, or Credit Suisse, provide the better predictor of OCR changes. Another for the "future honours projects" file.

6 comments:

  1. "So if I'm reading that right, it's an 81% chance of a 25 BP cut (or a 40.5% chance of a 50 BP, or some mix, unless they've some particularly good way sorting out those kinds of issues)."

    Your reading is right, it is indeed some mix of the two.

    "Credit Suisse is where the big money plays are tallied; iPredict is more likely to have insiders."

    True. I was under the impression they had banned trading at the RBNZ - also I'd note that they are nowhere near making a decision yet ... there are a few weeks to go.

    At the same time, the OIS market is swamped by overseas traders who in reality are trading on less information than bank economists here - so with global data shifting they could well be over-reacting.

    We will see I guess. Tbh, I'm more interested in just seeing what gets said by the Bank in June, and how different issues are having an influence on the NZ economy, then I am about whether they cut or not ;)

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    1. I don't know whether RBNZ banned trading. But I would certainly expect that an RBNZ analyst putting sufficient money on the line to hit those OIS markets would be fired; a bit of mucking around on iPredict after work isn't too likely to be noticed by anybody. RBNZ would have good reason to ban their guys from trading if they want an externally generated signal of market expectations. But I have zero knowledge of whether anybody from RBNZ trades on iPredict.

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    2. IMO, they should trade hard ... government departments can be a little cautious of markets though ;)

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  2. It would be awfully fun to go back through all of the closed iPredict contracts to see whether they, or Credit Suisse, provide the better predictor of OCR changes.

    You have a strange definition of fun there, Eric :)

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  3. "But I have zero knowledge of whether anybody from RBNZ trades on iPredict"
    I certainly know of a few RBNZ employees who do trade on iPredict

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