NZD: Rate Cut Cycle Has Kicked Off

NZD Could See Immediate Downside but Key Reversal Triggers Ahead

A dovish rate cut from the RBNZ has weighed on the kiwi dollar, especially given that the move was not fully priced in by the markets. Governor Orr’s comments that the economy is now facing its ‘darkest period’ and that a 50bps cut was considered has lent further downside pressures to the NZD. It was perhaps the Fed’s hold that likely pushed the RBNZ to adopt a slightly more conservative stance with the easing cycle for now.

However, two key catalysts remain on watch for any reversal in NZD's decline:

• Rate Cut Cycle Already Fully Priced In: The market has already priced in more than one full rate cut by the RBNZ at its upcoming October meeting, and end-2024 OCR is seen at 4.5% compared to RBNZ’s forecast of 4.92%. Market also expects a cumulative 160 basis points (bps) of rate cuts by mid-2025, compared to the RBNZ's latest projection of 101 bps in cuts over the same period. With the market already positioned for a dovish trajectory, there is limited room for further downside unless the RBNZ surprises with even more aggressive cuts or the economic data deteriorates sharply. Conversely, if the RBNZ's actions or economic data suggest that the market has overestimated the easing cycle, the NZD could experience a sharp rebound, especially against other currencies where the easing cycle may be underpriced, such as the Australian dollar (AUD). For comparison, the RBNZ didn’t see a rate cut
• Global Recession Fears: The NZD, like other commodity and activity currencies, is particularly sensitive to global economic conditions. The increasing concerns about a global recession, particularly if the US economy falters, could weigh on the NZD. A global downturn would likely lead to reduced demand for New Zealand's exports, weakening the currency. However, if the global economic outlook stabilizes or improves, and the US soft-landing remains achievable, the NZD could see a resurgence as risk sentiment recovers.

In summary, while the immediate outlook for the NZD appears bearish, these two factors—global recession fears and the market’s potentially over-extended pricing of the rate cut cycle—could act as significant reversal triggers for the currency. From a technical perspective, NZDUSD is locked in a consolidation and breakout may be needed for a clearer direction. A sustained move above the 200-day SMA (0.6088) could signal a bullish trend.

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