New Zealand Dollar: Double-dip Recession Brings Forward RBNZ Rate Cut Expectations

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The New Zealand Dollar faces headwinds after the confirmation of a double-dip recession that brings forward a Reserve Bank of New Zealand rate cut.

Statistics New Zealand reported the economy contracted 0.1% quarter-on-quarter in the final quarter of 2023. This follows the 0.3% slump recorded in Q3 2023, making for a technical recession.

This was the second straight quarter of contraction and fourth of the past five, which underscores how poor output has been in the past year.

Despite these data, the NZD is actually outperforming many of its peers, but this is almost exclusively on account of supportive global developments. These include a 'dovish' Federal Reserve decision midweek and a stronger AUD, which is lifting all the boats in the Antipodean harbour following today's release of extraordinarily strong job data.

The New Zealand to U.S. Dollar exchange rate is flat at 0.6080 and would be higher were it not for domestic developments.

The Pound to New Zealand Dollar exchange rate is softer by a third of a per cent at 2.0970 and the Euro-New Zealand Dollar is down 0.13% at 1.7939.

Capping the NZD on what should be a bullish day for this 'high beta' commodity currency is a decent dovish repricing in RBNZ rate cut expectations: with inflation easing and the economy struggling, markets are now pricing in the start of an RBNZ easing cycle in August vs. October at the start of this week.

Three cuts are seen this year versus the two predicted at this week's start.

This is unambiguously unsupportive of the currency in a foreign exchange market that is highly reactive to shifts in interest rate expectations.

"New Zealand has entered into a double-dip recession," says David Forrester, an analyst at Crédit Agricole. "This is NZ’s second technical recession within a year as the economy labours under the RBNZ’s 5.50% policy rate and El Nino weather conditions."

The economic outturn of 2023 might have been worse had it not been for record immigration rates, which underscored the economy's services sector and provided the only bright spot for growth.

"We continue to think the RBNZ will begin cutting rates not long after the Fed, in H224, and before the RBA," says Forrester.