NZD slumps as Q2 GDP contracts more than expected – BBH

The New Zealand Dollar (NZD) underperformed after Q2 GDP contracted by -0.9% q/q, a far steeper decline than expected, fueling RBNZ rate cut bets ahead of the October 8 meeting, BBH FX analysts report.

NZD/USD supported by 200-DMA despite domestic weakness

"NZD underperformed across the board and New Zealand bonds rallied. New Zealand real GDP dropped sharply in Q2. The economy contracted -0.9% q/q vs 0.9% in Q1. The decline was bigger than the -0.3% predicted by the market and the RBNZ. Manufacturing and construction were the largest contributor to the overall decrease in GDP. On the expenditure side, exports and business investment were the main downward drivers."

"The swaps markets dialed-up RBNZ rate cut bets. The next RBNZ meeting is on October 8, and odds of a 50bps cut to 2.50% rose from zero to roughly 30%. The RBNZ’s policy path projects the Official Cash Rate (OCR) to bottom at 2.50% by year-end. However, the steeper pullback in economic activity opens the door for additional easing towards the lower end of the RBNZ neutral range estimate between 1.60% and 4.20%."

"We expect NZD/USD to hold above its 200-day moving average (0.5838) because global growth remains resilient despite persistent uncertainty."