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The New Zealand dollar is tipped to underperform into year-end after today's GDP disappointment.
New Zealand's economy gave an achingly poor GDP print on Thursday with a quarterly -0.9% for the second quarter, which is substantially below the -0.3% estimate.
The annual reading was at -0.6%, which significantly undershot estimates for 0%. These data tell us the New Zealand economy is in a poor place and it could do with some additional support from government and other policy makers.
Step up the Reserve Bank of New Zealand, which can deliver help far quicker than any other institution; it's little wonder that bets for further rate cuts have increased in the wake of these data.
"The case for further rate cuts is clear amid spare capacity that is widening faster than anticipated and growth momentum undershooting forecasts," says Bader Al Sarraf, Research Analyst at Standard Chartered Bank
As rate cut bets ramp up, so Kiwi bond yields fall, and drag the currency alongside.
The scale of the reaction to the GDP is stark, with the below chart showing the losses registered against G10 peers on the day:
The pound to New Zealand dollar exchange rate surges to 2.30, and looks ready to test August highs at 2.32 in the coming days and weeks. The euro to New Zealand Dollar hits the big 2.00 figure, putting it at its highest exchange rate since 2009.
Against the U.S. Dollar, the Kiwi is down a per cent on the day, testing 0.5902.
Those concerned about NZD direction could lock in today's rate to secure their budget. Those on the other side of the trade could set automatic orders to trigger at their desired target. Find out more here.
"The NZD weakened notably on the release, as markets moved to price in the possibility of a larger October cut," says Nicholas Chia, FX and Macro Strategist at Standard Chartered.
The odds of a 50 basis point cut - a step up from a 25bp move - were raised on August 20 when two members of the RBNZ's board dissented from their four colleagues to vote for a 50bp cut.
The RBNZ cut the Official Cash Rate (OCR) to 3.0% on the day; however, the dissent was a surprise and spoke of underlying fears that the economy needed more help.
These GDP data confirm those fears and suggest perhaps the RBNZ should have been more aggressive.
"We now expect the RBNZ to deliver 25bps cuts in both October and November, taking the OCR to a 2.50% terminal rate," says Al Sarraf.
Chia explains that this repricing underscores the NZD’s vulnerability to growth disappointments and the erosion of its yield advantage as the easing cycle progresses.
"We expect the NZD to underperform into year-end," he adds.