NZ dollar still suffering after GDP dip

The Kiwi is still suffering the after-effects of a poor GDP outcome for the June quarter. Photo / NZME

The New Zealand dollar has remained under downward pressure after the release of disappointing June quarter domestic GDP data earlier this month.

Against the US dollar, the Kiwi now trades at around US57.79c, down about US2c from just before the release of data, which showed the economy contracted by 0.9% in the June quarter against market expectations of a 0.4% decline.

The NZ-Aussie dollar cross rate is now at around A88.18c from A89.67c before the GDP release on September 18.

“People have cottoned on to news about the economy and that has filtered into people’s views on the Reserve Bank and what the right value of the New Zealand dollar should be,” Westpac senior economist Darren Gibbs said.

“On the Aussie side, Australian CPI [Consumers Price Index] numbers came in a bit higher than expected and you had the Reserve Bank of Australia’s Governor [Michele Bullock] saying the economy was a bit stronger than was expected,” Gibbs said.

“So the Kiwi-Aussie cross rate is being pulled from both sides; the Kiwi leg is being pulled down by the chance of more Reserve Bank easing, while in Australia they’ve been looking at their data and the possibility of less RBA action.”

The New Zealand market is pricing in a lower Official Cash Rate (OCR) from the RBNZ than was perceived going into the GDP release.

Overnight indexed swaps now point to a low of 2.27% in the OCR - about 20 basis points lower than was priced in before GDP.

In the US, the markets are pricing less policy easing from the Federal Reserve after unexpectedly strong growth data there.

“The US last week published quite strong GDP while data flow here is going in the other direction, so I think there is quite a strong international narrative at the moment about New Zealand being the weak player in the G10-G20 currency universe,“ Gibbs said.

Meanwhile, the market is fully pricing in a 25 basis point cut at next Wednesday’s OCR review by the Reserve Bank of NZ, and a 20% chance that it will cut by 50 basis points.

BNZ said last week was another challenging one for the NZ dollar as it underperformed and fell through the key support level of US58c.

“Adding to domestic headwinds, stronger than expected US economic data contributed to poor NZD performance,” BNZ said.

“Fundamentally, we think the NZD looks cheap,” BNZ said.

“We don’t believe the NZ economy is as weak as the Q2 [second quarter] data portrayed, and this should become evident in data over the coming months.

“The market gives no credit to NZ’s record terms of trade and sharply improving external balance,” BNZ said.

“We also see plenty of scope for US economic data to deteriorate from here.”

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.