Image courtesy of Kiwibank.
The New Zealand Dollar is under pressure ahead of Wednesday's decision.
New data on the state of New Zealand's economy highlighted why the Reserve Bank of New Zealand (RBNZ) will need to cut interest rates aggressively tomorrow.
The New Zealand Dollar fell after New Zealand's Quarterly Survey of Business Opinion, released Tuesday, showed Business confidence stalled in the third quarter.
Currency weakness signalled markets saw the data as raising the odds that the RBNZ might opt for a 'big' 50 basis point cut as opposed to a rudimentary 25bp move.
"We are failing to gain traction to get out of this hole – the wheels are spinning in the mud. More support is needed, the RBNZ needs to get there faster and deliver a 50 basis point cut tomorrow or risk delivering the stimulus too late to matter to households and businesses," says Jane Turner, Senior Economist at Auckland Savings Bank.
The latest QSBO showed 15% of firms expect an improvement in general economic conditions over the coming months on a seasonally adjusted basis, down from the net 26% expecting an improvement in the June quarter.
Firms' hiring and investment intentions have also reduced. A net 23% of firms cut staff headcount in the September quarter.
Image courtesy of Kiwibank.
Weak demand continues to be the key concern for firms, with a net 63% of firms reporting a lack of sales as the primary constraint on their business.
"Business confidence is waning. Because the expected recovery in demand has disappointed. For almost two years now, firms have reported a decline in activity," says Mary Jo Vergara, Senior Economist at Kiwibank.
"The Kiwi economy is underperforming, and clearly needs stimulus. More accommodative interest rate settings are required. This report supports a 50bps cut tomorrow," she adds.
New Zealand dollar weakness reflects the market's unpreparedness for a 50bp move.
"NZD/USD briefly dropped below 0.5825 after New Zealand’s Quarterly Survey of Business Opinion showed business confidence faltered and inflation indicators remained weak in Q3 25. The markets are only pricing a 44% chance of a 50bp cut. As such, a 50bp cut can push NZD/USD fall toward support at 0.5672," say currency analysts at Commonwealth Bank of Australia.
Elsewhere, the GBP/NZD is higher by 0.25% on the day at 2.3138, while the EUR/NZD is up 0.20% at 2.009.
Readers should be aware that the losses we are seeing in NZD could be a case of the market front-running tomorrow's decision, meaning the currency can recover in relief on the actual decision.
Sell the rumour, buy the fact.