FX comment – NZD slumps after dismal Q1 GDP print

by: Roy Teo

  • NZD slumps after dismal Q1 GDP print
  • Further RBNZ rate cuts likely



NZD slumps after dismal Q1 GDP print

The New Zealand dollar (NZD) was sold off aggressively by almost a cent to below 0.6890 after the economy expanded at a slower pace of 2.6%yoy compared to market expectations of 3.1%. This is also lower than the Reserve Bank of New Zealand (RBNZ) projections of 3.1% in the June assessment. According to Statistics New Zealand, agriculture was down 2.3% due to lower milk production. In addition, mining was down 7.8% due to decreased exploration activity and oil and gas extraction. The NZD has slumped by more than 4% from 0.72 since the RBNZ surprised financial markets, including us by cutting monetary policy rates by 25bp. However technical indicators imply that the currency is in oversold territory and hence a relief rally in the short term cannot be ruled out. In addition, the options market demand to hedge further downside risk in the NZD has also not increased.


Further RBNZ rate cuts likely

The disappointing Q1 GDP print this morning has increased the risk that the RBNZ will respond sooner than later with further rate cuts. We expect the RBNZ to lower the Official Cash Rate by another 25bp to 3.0% in Q3. A rate cut in July is currently about 50% priced in by financial markets. Another rate cut in the last quarter of this year cannot be ruled out if dairy prices do not recover. We will be releasing a FX Watch shortly reflecting a more bearish NZD/USD forecast given the above scenario.