Kiwi's Challenge: Rate Cuts and Global Headwinds
Monday, 21 October, Week 43
New Zealand, a parliamentary democracy and constitutional monarchy led by Prime Minister Chris Luxon, holds a respected global standing, known for its social policies and active role in Pacific affairs. A member of the Five Eyes alliance, its open economy depends heavily on trade, particularly with China. The most significant upcoming event is the release of Q3 employment and unemployment data on November 5th (Week 45), crucial for the RBNZ's policy decisions.
The RBNZ’s surprise 25 bps rate cut to 4.75% on August 14th (Week 33, source: RBNZ) has dominated NZD sentiment in the past month (September 1st - October 21st). Initially triggering a 1% drop to $0.601, the cut sparked uncertainty about further easing. Mixed signals followed: a confirmed 0.2% GDP contraction in Q2 (Week 38, Statistics New Zealand) increased rate cut bets; June's 4.6% unemployment rise (Week 37, Statistics New Zealand) moderated these bets slightly. September's 2.2% YoY inflation (Week 42, Statistics New Zealand) added to dovish expectations, pushing the NZD to a two-month low of $0.613 on October 10th. Further weakening to $0.605 followed the softer-than-expected September 18th inflation data. Yet, business confidence rebounding to a 14-year high in September (Week 42, ANZ) offered the currency some respite.
Investment Thesis:
Upcoming Week (October 21-28): Neutral. Range-bound trading is expected for the NZD, with the September Balance of Trade data release today potentially adding volatility. Limited RBNZ announcements mean cautious positioning is likely. Market focus remains on monetary policy’s future path.
Upcoming Month (October 21st - November 30th): Bearish. Downward pressure is anticipated. The RBNZ's dovish stance and potential rate cuts, coupled with global and Chinese economic slowdowns, could weigh heavily. Positive surprises in domestic data, particularly GDP and employment, could offer support.
New Zealand Financial Markets: Balancing Act
New Zealand's financial markets revolve around the NZD, the S&P/NZX 50, government bonds, and dairy. The Q3 employment and unemployment data release on November 5th (Week 45) is the most significant upcoming event, impacting RBNZ policy and, consequently, market dynamics.
NZX 50: Volatility and Value
The NZX 50 has been volatile recently (September 1st-October 21st), swinging from a 32-month high of 12,820 on September 12th (Week 37) to a six-week low of 12,304 on September 24th (Week 39). While the August 14th RBNZ rate cut offered initial support, the confirmed Q2 GDP contraction and weak earnings reports fuelled declines. This volatility has impacted the NZD, with the initial post-rate cut rally fading as economic concerns mounted.
New Zealand Bond Market: Low Yields and Rate Cut Bets
The New Zealand bond market has mirrored the RBNZ's dovish shift. The 10-year yield fell to a one-month low of 0.83% on August 13th (Week 33), then rose slightly after the rate cut, reflecting uncertainty. Current yields around 0.9% suggest continued rate cut expectations, potentially pressuring the NZD if yields remain low.
Dairy: A Key Ingredient in NZD's Recipe
Dairy, crucial for New Zealand's exports, has experienced price swings impacting the NZD. As a major export, dairy prices directly affect the terms of trade. Lower prices can weaken the NZD, while higher prices offer support. Traders must monitor global dairy market trends for potential NZD impacts.
New Zealand Economy: Navigating Headwinds
New Zealand's economy is heavily reliant on agriculture, with dairy, meat, and wood being key exports to China and Australia. The upcoming Q3 GDP data release on November 5th (Week 45) is crucial, offering insights into economic recovery and influencing the RBNZ's future policy.
GDP: Seeking a Foothold
New Zealand's economy contracted by 0.2% in Q2 (Week 38, Statistics New Zealand), driven by declines in retail trade, agriculture, and wholesale trade, while manufacturing saw a 1.9% rise. This contraction has increased recession fears and the likelihood of further RBNZ rate cuts, weakening the NZD. The outlook remains uncertain, with global economic slowdown and Chinese weakness posing headwinds.
Inflation: Taming the Price Beast
New Zealand's inflation has cooled considerably, reaching 2.2% YoY in September (Week 42, Statistics New Zealand), driven by increases in food, housing, and health costs, while transport and education saw price drops. This decline is within the RBNZ’s 1-3% target range, creating room for rate cuts, which could put downward pressure on the NZD. But easing inflation could potentially boost consumer spending and economic growth, offering some support.
Labour Market: A Balancing Act
New Zealand's labour market presents a mixed picture. Q2 unemployment rose to 4.6% (Week 37, Statistics New Zealand), underutilisation rose to 11.8%, with labour force participation at 71.7%. However, employment also grew by 0.4% in June (Week 42, Statistics New Zealand). This duality creates uncertainty for the RBNZ. Rising unemployment may support further rate cuts and thus weigh on the NZD, while employment growth hints at underlying economic strength.
Consumer and Business Sentiment: Diverging Paths
Consumer and business sentiment are on diverging paths. Consumer confidence rose for a third consecutive month in Q3, reaching its highest since January 2022 (Week 38, ANZ-Roy Morgan), potentially boosting consumer spending and the NZD. Business confidence fell to a nine-month low in August (Week 37), reflecting global economic and geopolitical anxieties. This divergence adds to NZD uncertainty.
Upcoming Key Economic Data (Week of October 21-28):
Balance of Trade (September): Release date Monday, October 21st.
New Zealand Monetary Policy: Charting a Dovish Course
New Zealand's monetary policy is steered by the Reserve Bank of New Zealand (RBNZ), led by Governor Adrian Orr. The upcoming Financial Stability Report, due on November 5th (Week 45), is crucial, assessing risks to the financial system.
RBNZ Policy: Dovish Pivot and Market Reactions
The RBNZ's dovish pivot, marked by the surprise 25 bps rate cut to 4.75% on August 14th (Week 33), has dominated recent monetary policy. This shift, prompted by rising economic concerns and easing inflation, initially sent the NZD tumbling. The market continues to adjust to the RBNZ’s new stance, with the potential for further cuts influencing NZD valuation.
New Zealand Geopolitics: Navigating External Risks
Geopolitical Headwinds: Global Tensions and Trade Wars
Geopolitical risks, especially US-China trade tensions, weigh on New Zealand's export-dependent economy. The potential for escalating trade disputes could negatively impact exports and the NZD, creating ongoing uncertainty.
Sovereign Risk: Stability Amidst Global Uncertainty
New Zealand's sovereign risk remains low, given its strong credit rating and political stability. However, its small, open economy and reliance on trade leave it exposed to global shocks, like a Chinese economic slowdown, which could negatively impact exports and growth, thus affecting the NZD.
NZD Valuation: Searching for Stability
The NZD has weakened over the past month (September 1-October 21), falling from approximately $0.63 to around $0.605. The August 14th surprise RBNZ rate cut fuelled the initial decline. A two-month low of $0.613 was reached on October 10th. While a weaker USD has offered some support, dovish RBNZ policy expectations and a slowing global economy maintain downward pressure. The September 18th inflation report further weakened the NZD to $0.605.
Summary, Outlook and Action Points
The NZD is navigating a complex landscape, characterised by RBNZ dovishness, global economic slowdown, and Chinese weakness. The market expects further RBNZ rate cuts, pressuring the NZD. Positive surprises in domestic economic data, particularly Q3 GDP and employment figures, could offer limited support.
Upcoming week (October 21-28): The NZD likely remains range-bound. Focus will be on today’s Balance of Trade data.
Action Points:
Monitor NZD closely and identify support and resistance levels.
Consider hedging strategies against further declines.
Remain agile, adjusting positions according to incoming data.
Sources:
Reserve Bank of New Zealand (RBNZ)
Statistics New Zealand
ANZ Bank New Zealand
Trading Economics
Bloomberg
Reuters