New Zealand’s economic growth data for the second quarter is anticipated to show a quarter-on-quarter decline. However, year-on-year growth is expected to improve from the first quarter’s stagnation. The New Zealand dollar was affected overnight by the Federal Open Market Committee’s actions and subsequent reactions.
Australia will release job data for August, with unemployment projected to stay steady. The Reserve Bank of Australia currently does not have major concerns regarding the labour market, despite some signs of slowing down.
Outlook For New Zealand Dollar
With New Zealand’s Q2 GDP data expected to show a contraction, we should anticipate continued weakness in the New Zealand dollar. Yesterday’s hawkish tone from the US Federal Reserve already put pressure on the kiwi, and a poor growth figure could see it test new lows. For the next few weeks, buying NZD/USD put options seems like a reasonable hedge against a worse-than-expected economic print.
Australia’s jobs report for August is likely to confirm a more stable picture, with unemployment expected to hold near 4.1%. This steady outlook from the labor market reinforces the Reserve Bank of Australia’s patient stance, suggesting less volatility for the Aussie dollar compared to its neighbor. This stability might make selling short-dated volatility on AUD/USD an attractive strategy if the numbers come in as expected.
The clearest opportunity in the coming weeks appears to be the contrast between the two economies. The divergence between a slowing New Zealand and a steady Australia points towards strength in the AUD/NZD currency pair. We see establishing long positions in AUD/NZD, possibly through futures contracts, as a primary strategy to capitalize on this regional economic split.
Market Dynamics
We can see parallels to the period in late 2023, when New Zealand slipped into a brief technical recession while Australia’s economy remained more resilient on the back of its resource exports. Current market pricing shows options traders are already building in higher expected volatility for the NZD than the AUD over the next month. This supports the view that the market is bracing for more kiwi-specific downside.
Looking ahead, the main drivers will remain central bank policy and upcoming inflation data. The Fed’s signal yesterday for potentially one more rate hike in 2025 will likely keep the US dollar strong, creating headwinds for both the NZD and AUD. Therefore, any long positions in the AUD should preferably be hedged against the NZD rather than the strengthening US dollar.
