The RBNZ Chief Economist, Conway, indicates that the full consequences of the US tariffs are uncertain, with the central bank continually evaluating the data. He suggests that these tariffs may dampen business investment and lower inflation in New Zealand.
Global Economic Outlook
Conway also anticipates a weaker global economy and reduced global demand due to the tariffs. The Q2 CPI data matched RBNZ’s expectations, and there is potential to further cut rates if inflation continues to decline.
Preliminary data show that New Zealand’s economic growth slowed in the June quarter.
Based on the outlook from Mr. Conway, we believe the Reserve Bank of New Zealand is signaling a clear path toward lower interest rates. His concerns over tariffs weakening global demand directly support the view that the next move for the Official Cash Rate, currently at 5.50%, is down. Derivative traders should therefore position for falling rates, potentially through interest rate swaps or by going long on 90-day bank bill futures.
Currency Market Implications
The comments strongly suggest a weaker New Zealand dollar is on the horizon. Lower interest rates decrease the appeal of holding a currency, and we should consider strategies that benefit from a decline in the NZD/USD pair, which has recently struggled to hold levels above 0.6200. This could involve buying put options on the currency to hedge against or profit from a drop.
His remarks about dampened business investment and slower growth are already being reflected in the data. With Stats NZ confirming the economy contracted by 0.1% in the March 2024 quarter, entering a technical recession, we anticipate increased market volatility. Buying options contracts, rather than outright futures, could be a prudent way to trade this uncertain environment as their value increases with market choppiness.
This situation is reminiscent of the period leading up to the RBNZ’s surprise 50-basis-point rate cut in August 2019, which was also driven by global trade fears and slowing domestic momentum. Following that decision, the kiwi dollar fell sharply against major currencies. We could see a similar, albeit perhaps more gradual, reaction in the currency markets in the coming weeks as rate cut expectations solidify.
