NZD concerns as Q2 GDP confirms contraction

This report is your guide to understanding the forces driving the NZD, offering forex traders the insights they need to make informed decisions. We'll cover geopolitics, fiscal policy, economic indicators, and monetary policy – everything you need to know.

Dominant theme: RBNZ rate cut expectations

The RBNZ's surprise rate cut in August, has sparked intense speculation about its future policy path. The market is trying to gauge whether more cuts are on the horizon. Mixed economic signals, like strong jobs figures juxtaposed with easing inflation and the confirmation of a second quarter contraction, have fueled this uncertainty.

Timeline:

• September 19th: The release of second-quarter GDP figures today, confirming a 0.2% contraction, has increased speculation about the potential for further rate cuts from the RBNZ, which could put downward pressure on the NZD.

• September 5th: New Zealand's unemployment rate rose less than expected in the second quarter, prompting some traders to reassess the likelihood of an immediate RBNZ rate cut. This, combined with a weaker USD, helped the NZD to hold near a two-week high.

• August 14th: The NZD fell 1% to $0.601 after the RBNZ's surprise rate cut. The bank projected the cash rate to fall to 4.92% by year-end and 3.85% by the end of 2025, expressing confidence in the inflation outlook.

• August 13th: Ahead of the RBNZ's policy decision, the NZD rose to $0.603. While a hold was expected, concerns about the economy and declining inflation fueled speculation about a possible rate cut.

Emerging theme: China's economic slowdown

The health of the Chinese economy is critical for New Zealand, its largest trading partner. Recent data from China has been underwhelming, with weaker-than-expected GDP growth and retail sales. This slowdown could have negative spillover effects on New Zealand's export-oriented economy.

The geopolitical landscape

New Zealand's reliance on international trade makes it highly vulnerable to geopolitical events. The ongoing trade war between the US and China, along with escalating tensions in the Middle East, have created a complex environment for New Zealand's economy.

The trade war, exacerbated by the US's recent tariffs on Chinese technologies, has raised concerns that Beijing might retaliate against New Zealand's exports, particularly agricultural products. The potential for China to formally announce tariffs on thermoplastics against the US and/or EU in the coming month adds another layer of complexity.

Adding to these challenges is the escalating conflict in the Middle East, with Iran's potential retaliation for the assassination of Hamas political leader Ismail Haniyeh. A wider regional conflict could disrupt global energy markets, impacting New Zealand's energy costs and creating a ripple effect across its economy.

Economic fundamentals

New Zealand’s economic fundamentals are sending mixed signals. While GDP growth exceeded expectations in the first quarter of 2024, the economy contracted by 0.2% in the second quarter, confirming the fears of a slowdown. Inflation has eased considerably from its 2023 peak, but non-tradables inflation remains a concern.

This, along with slowing wage growth, suggests a softening labour market that could impact consumer spending and overall economic activity.

Moving into the upcoming month, forex traders will be watching closely for signs of recovery in the economy. Key data points like retail sales, consumer confidence, and business investment will be important indicators to monitor. The RBNZ's commentary and projections in its upcoming meeting will also be crucial for gauging the central bank's outlook for the economy.

Monetary policy

The RBNZ's rate cut signals a shift towards a more accommodative monetary policy. The central bank is clearly attempting to strike a balance between supporting economic growth and managing inflation.

This reduction, the first in four years, highlights the RBNZ's willingness to adjust its stance to support economic growth.

The upcoming RBNZ interest rate decision, scheduled for Wednesday, October 9th, Week 41, will be crucial for understanding the future path of monetary policy. Forex traders should pay close attention to the RBNZ's forward guidance, as it will likely impact the NZD's performance.

Macroeconomic outlook

New Zealand’s macroeconomic outlook presents a mixed picture, characterised by a blend of opportunities and challenges. The recent rate cut by the RBNZ and the government's fiscal stimulus measures are expected to provide some support to economic activity, but the pace and extent of the recovery remain uncertain, especially with the confirmation of a second quarter contraction.

This contraction, coupled with projected GDP declines in the coming quarters, highlights the challenges facing the New Zealand economy. The RBNZ's actions and forward guidance will be crucial in navigating these challenges and supporting a recovery.

The NZD is expected to remain sensitive to global market sentiment and the monetary policy outlook of major economies, particularly the US. With the Federal Reserve likely to implement further rate cuts in the coming months, the NZD could weaken against the USD. However, the RBNZ's own dovish stance and potential for further rate cuts could limit the extent of the NZD's depreciation.

Key economic indicators to watch

The following key economic events are scheduled for release in the upcoming month and could significantly influence the macroeconomic outlook for New Zealand and the NZD:

ANZ Business Confidence (September): Due on Monday, 30th September, Week 39 (leading indicator). The previous reading was 50.6. If the index remains above 50.0, it would signal continued business sector optimism. However, a decline in business confidence could increase uncertainty about the economic outlook, potentially weakening the NZD.

Business NZ Performance of Manufacturing Index (PMI) (September): Due on Thursday, 10th October, Week 40 (leading indicator). The consensus forecast is 50.0. A figure in line with this forecast would suggest stabilisation in the manufacturing sector, potentially providing a slight boost to the NZD. However, if the PMI declines further, concerns about the manufacturing sector's health could weigh on the NZD.

Conclusion

New Zealand’s macroeconomic landscape is marked by both challenges and potential. The recent rate cut by the RBNZ, combined with the government's fiscal stimulus measures, is expected to provide some support to economic activity, but the pace and extent of the recovery remain uncertain, especially given the recent confirmation of a second-quarter GDP contraction.

The NZD is expected to be sensitive to global market sentiment and the policy path of major central banks, particularly the Fed. The potential for further Fed rate cuts could put downward pressure on the NZD.

Sources

• Stratfor Worldview.

• Reserve Bank of New Zealand.

• Trading Economics.

• Statistics New Zealand.

• ANZ Bank New Zealand.