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The culprit behind NZD weakness is disappointing Australian labour market data.
The New Zealand economy was surprisingly strong in the final quarter of 2024, but the New Zealand Dollar is struggling.
The New Zealand economy grew 0.7% q/q in Q4 said Statistics New Zealand, exceeding estimates for 0.5% and the Reserve Bank of New Zealand's projection of 0.3%.
"Today’s print confirms that New Zealand has likely passed the worst of its downturn," says Bader Al Sarraf, an analyst at Standard Chartered.
The NZD should be rallying on the news as the strong outcome provides some cover for the Reserve Bank of New Zealand (RBNZ) to stop cutting interest rates, removing a major drag on the currency.
The market reaction suggests this is unlikely to happen:
The Pound-to-New Zealand Dollar exchange rate (GBP/NZD) is half a per cent higher on the day at 2.2480 and EUR/NZD is 0.56% higher at 1.8850.
NZD/USD is three-quarters of a per cent down at 0.5772.
So why is the New Zealand Dollar weaker despite the strong GDP data?
Currency analysts say a selloff in the Australian Dollar following surprisingly poor labour market data is weighing on the New Zealand dollar.
"NZD/USD fell by around 0.5% alongside a lower AUD," says Joseph Capurso, an economist at Commonwealth Bank of Australia.
On the same day NZ GDP numbers were released, Australian employment figures came out, showing a significant 52.8k fall (it was expected to rise by 30k) in February.
And, the previous month's number was revised lower to a 30.5k increase.
Above: The NZD falls against GBP as Australian bond yields fall (lower panel). This confirms expectations for a quickening in rate cuts in Australia is weighing on NZD.
The Australian labour market data surprise prompted markets to increase expectations for an acceleration in interest rate cuts at the Reserve Bank of Australia.
This weighed on Australian bond yields, pulling the closely correlated New Zealand bond yield lower. The AUD and NZD were, in turn, dragged lower by falling yields in both countries.
In short, markets see a slowdown on Australia being bad for New Zealand, regardless of the solid Q4 economic data.
Economists at Auckland-based ASB say they are sceptical that the growth drivers in Q4 can maintain their pace given the broader global headwinds.
They, like other analysts, think more rate cuts are in store for New Zealand.
"While today’s print confirms that New Zealand has likely passed the worst of its downturn, we believe growth remains well below potential, and output is still far from levels that would threaten inflationary stability," says Standard Chartered's Al Sarraf.
"We expect the RBNZ to look through this stronger-than-expected Q4 print, as it has already placed greater weight on high-frequency indicators, which remain consistent with gradual monetary easing," adds Al Sarraf.
Markets are currently about 70bp of RBNZ interest rate cuts by year-end, which is weighing on New Zealand yields and its Dollar.