New Zealand Dollar Under the Hammer: PMI Data Confirms "Leading Indicators are Getting more Worrisome by the Day"

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A key survey of New Zealand manufacturing businesses suggests the country's economy is at risk of slowing, leading markets to increase bets that the Reserve Bank of New Zealand (RBNZ) will have to cut interest rates further.

The BNZ / Business NZ Performance of Manufacturing Index (PMI) for May read at 50.2, far below the market estimate for a reading of 53.0 to be delivered.

For foreign exchange markets, it is a surprise that drives moves in a currency, and it will therefore come as little surprise that the scale of this disappointment has triggered a negative reaction in the NZ Dolar.

Any PMI reading that comes in below 50 signals contraction, suggesting the New Zealand economy's manufacturing sector is close to slipping into reverse. The survey revealed that business confidence in the manufacturing sector fell to its lowest level since the end of 2012.

"Production (46.4) was at its lowest value since April 2012, while the other key sub-index of new orders (50.4) only just managed to stay in positive territory. Given the latter feeds through into the former, it does not instil a strong belief that the sector will show solid improvement over the next few months," says BusinessNZ's executive director for manufacturing, Catherine Beard.

Image courtesy of BNZ

"As a growth risk indicator it may not be flashing bright red just yet, but it is moving in that direction in taking on a darker shade of amber," says Doug Steel, an economist with New Zealand lender BNZ.

The New Zealand Dollar has understandably gone lower on the data, and looking at the currency's recent performance we can see it is now the worst-performing major global currency over the past week:

The Pound-to-New Zealand Dollar exchange rate has recovered some lost ground over recent days and is quoted at 1.9359 ahead of the weekend, having been as low as 1.9095 earlier in the week. The U.S. Dollar / New Zealand Dollar exchange rate is quoted at 0.6543, having been as low as 0.6525 earlier this week.

The decline in the New Zealand Dollar will in large part reflect a repositioning in market expectations for another cut at the RBNZ.

The data has, "reinforced expectations for further RBNZ rate cuts which have weighed on the kiwi amidst more risk-averse trading conditions as well. It has increased the risk of back to back RBNZ rate cuts at their upcoming meeting on the 26th June, although another cut is still judged as more likely in August," says Lee Hardman, currency analyst with MUFG.

The currency rule-book states that when central banks cut interest rates their currency falls, and the New Zealand Dollar will therefore likely remain under pressure as future interest rate cuts are signalled by poor domestic data.

"The NZD’s resilience is starting to crack. While a more balanced RBNZ could provide some interim support, like the AUD, there is little domestic story to justify the strength," says Danielle Been, a foreign exchange strategist with ANZ. "With a challenging global story over the medium term, we think conditions are in place for the NZD to fall below fair value in 2019."

Economists at BNZ say that the New Zealand economy could still put in a relatively robust 0.6% growth rate for the first quarter of a whole when Q1 GDP statistics are released next week, thanks to strong building and reasonable retail activity.

A better-than-expected GDP print could yet see the RBNZ opt to sit on the sidelines when it comes to cutting interest rates as they await further data, such a decision could provide some underpinning to the New Zealand Dollar.

But, the warning from BNZ is that "leading indicators are getting more worrisome by the day," and we expect the market to remain cautious on the NZ Dollar going forward.

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