The New Zealand Dollar to Pound Rate Drops Sharply as the RBNZ Cut 50bps

October 10, 2024 - Written by David Woodsmith

STORY LINK The New Zealand Dollar to Pound Rate Drops Sharply as the RBNZ Cut 50bps

Wednesday’s session is mostly flat as the dollar and yields consolidate recent gains.

The big move of the day comes from the New Zealand dollar which fell around –1%.

This came after the RBNZ cut rates by another 50bps. This was no real surprise to markets, but the bank’s outlook and dovish tone weighed on exhancge rates.

Wednesday’s session is flat after an erratic few sessions which saw the S&P500 rally strongly on Friday after the NFP release, drop on Monday and then rally again on Tuesday to close at exactly the same place as it did on Friday. Stocks are clearly undecided if the strong data is a good or bad thing – on one hand a soldi economy is good news, but on the other it will mean less rate cuts and “higher for longer” yields is back in the narrative once again. The 10-year yield has gained from around 3.6% in September to just over 4% this week and this has been a positive for the US dollar which posted its best weekly performance since 2022.

The FOMC Minutes from the September meeting are out later on Wednesday but there is little scope for surprises as the Fed have made it quite clear they intend to cut 25bps in November and 25bps in December. Multiple Fed member speeches in the days after the meeting have underlined the Fed’s stance and this will have been made more certain by the solid NFP report. The message is that there is no rush to cut aggressively and the 50bps cut in September was simply front loading the cycle and ensuring the economy stays strong.

Another factor helping the US dollar is the stance of other central banks appears to be more dovish than the Fed’s current stance. The Swiss National Bank and Riksbank have already cut by 75bps. The ECB and BoC have cut 50bps and look ready to cut again, and on Wednesday morning, the RBNZ made a 50bps cut to add to August’s 25bps.

RBNZ Go Big With a 50bps Cut

NZDUSD is down –1% on Wednesday following the RBNZ’s 50bps cut. This is perhaps surprising as the markets had already priced in 45bps ahead of the meeting; the big cut was no surprise.

Signs of slowing in the economy made the move probable. Second quarter GDP report showed the economy slightly contracted. With inflation seemingly under control and potentially already below the RBNZ’s 2% target rate, there was no reason to keep rates near 5%. Indeed, the RBNZ still had the highest interest rates of all the G7 at 5.25% so a large cut to get them closer to the neutral rate seemed an easy call. The Fed’s 50bps September cut also helped them as it set a precedent.

The reason for the large drop in the Kiwi likely relates to the dovish communication and the rather gloomy outlook for the economy. As ING point out,

“The RBNZ also delivered a line in its press release which we think makes a lot of sense. The "current market pricing of risk is especially sensitive to downside economic surprises". With fears of slower growth building and the Middle East situation still very dangerous, equity markets look at risk.”

Higher oil could start to weigh on economies, especially those with a high dependency on imports like the EU, Japan and New Zealand. Even if New Zealand manages to get back to positive growth, the conditions seem to support a stagflation period rather than strong growth. The EU is a good example of this as it has hovered around 0% growth for several years now, weighed down by manufacturing and high energy prices. The Kiwi may have further to fall as the RBNZ scrambles to get rates low enough to support the economy.

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