NZD/USD: Kiwi Craters as Deep Recession Fuels RBNZ Rate Cut Bets

New Zealand’s economy contracts 1% in Q3, following a revised 1.1% drop in Q2
Markets price a 91% chance of another 50bps RBNZ rate cut in February
NZD/USD plunges over 2%, marking its largest drop since May 2023
Kiwi trades near .5600, with potential to revisit October 2022 lows at .5515

Summary

New Zealand is not only in recession but a deep one, increasing the risk of further large-scale interest rate cuts from the Reserve Bank of New Zealand. Combined with the Fed’s hawkish rate cut delivered earlier in the session, the news has seen NZD/USD suffer its largest one-day decline since May 2023, leaving it at more than two-year lows.

Kiwi economy going down the gurgler

There is no other way to describe New Zealand’s Q3 GDP report than ugly. The economy contracted 1% following a 1.1% drop in Q2 that was originally reported as -0.2%. Markets were looking for a smaller contraction of 0.2%, the same level forecast by the RBNZ less than a month ago. Oops!

Rather than the economy contracting 0.4% over the year, it was more than three times larger at 1.5%. That’s not only a recession but a deep one, especially when you consider New Zealand’s rapid population growth.

GDP per capita fell 1.2% in Q3. It was the eighth consecutive quarterly fall in the series. Real gross national disposable income, a measure of living standards, declined 0.8% from three months earlier. That's not great news.

RBNZ pressured to slash rates further

The horror show has seen traders strengthen their conviction that the RBNZ will follow up the 50bps rate cuts delivered in October and November with another in February, putting the implied probability at around 91%. A total of 100bps of cuts are priced for 2025. Before today’s data that looked reasonable, but the risk now is the RBNZ will deliver more.

Source: Bloomberg

Already under pressure thanks to the Federal Reserve’s hawkish rate cut as the FOMC removed 50bps of easing from its 2025 forecast, the GDP report saw NZD/USD sink like a stone.

It declined more than 2% on Thursday, logging the largest percentage decline since May 2023. It now trades at levels last seen in October 2022. The Kiwi, a flightless bird, is well and truly grounded.

NZD/USD belted, bruised and no sign of a bounce

Source: TradingView

As flagged earlier this week, the break of wedge support has seen NZD/USD losses accelerate, bringing a potential retest of.5600 on the radar. If that minor level were to buckle, we’re talking about a possible return to .5515, the lows struck in October 2022. On the topside, resistance may be encountered at .5754, even if the price is unlikely to return their near-term.

RSI (14) and MACD are generating bearish signals on momentum, although the former is very oversold on the daily timeframe, increasing the risk of a sudden squeeze. Traders should look for obvious bottoming signals on shorter timeframes to determine when one may occur, but the prevailing bias remains to sell rips near-term.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.