Insights 
VT 
NZD/USD fell 1% to a six-month low near 0.5740 following a 50bps cut to New Zealand’s Official Cash Rate, now at 2.50%. The Reserve Bank of New Zealand indicated further potential reductions, pointing to spare capacity and downside risks for activity and inflation.
Market Perceptions And Expectations
Market perceptions changed quickly, with swaps suggesting the OCR may reduce to 1.75% over the coming year. Despite the RBNZ predicting an OCR stabilising around 2.50% in August, the swaps market shifted lower, implying a potential future OCR of 1.75% compared to a previous expectation of 2.25%.
The policy change was broader than anticipated, as only 40% was factored in by markets. The RBNZ’s guidance indicates the OCR could align closer to the lower end of its estimated neutral range of 1.60% to 4.20%.
The FXStreet Insights Team aggregates market observations from experts, although they urge readers to conduct their research before making financial decisions. The team stresses that the information provided is for informative purposes only and involves risks and uncertainties. Markets and instruments should not be viewed as recommendations to trade.
The Reserve Bank of New Zealand’s surprise 50 basis point rate cut has fundamentally shifted our view on the Kiwi dollar. With the central bank signaling more cuts are possible, the path of least resistance for the NZD is lower. We should anticipate continued downward pressure on the currency in the coming weeks.
Trading And Economic Outlook
This environment is favorable for traders looking to short the NZD, particularly against a strong US dollar. We believe derivative strategies, such as buying NZD/USD put options or entering into swaps that bet on New Zealand’s rates falling further, are now warranted. These positions allow us to capitalize on the dovish momentum and the market’s new expectation for rates to bottom around 1.75%.
Looking back, the signs of this slowdown were apparent after New Zealand entered a technical recession in late 2023. Real data from that period confirms the economy contracted, with Stats NZ reporting a 0.1% fall in GDP for the December 2023 quarter. This weakness, combined with inflation finally falling to 4.0% by March 2024, set the stage for the aggressive rate cuts we are seeing now.
The broader market context further supports a bearish stance on the NZD/USD pair. The ongoing US government shutdown is strengthening the US dollar as a safe-haven asset. This creates a powerful divergence where a fundamentally weakening currency is paired against one benefiting from global uncertainty.
Our focus now shifts to incoming New Zealand economic data ahead of the next monetary policy update on November 26. Any further signs of weakness in inflation or employment figures will likely intensify bets for more RBNZ cuts. We will be watching these releases closely to adjust our derivative positions accordingly.
