New Zealand’s currency, the kiwi, slumped to its weakest level since August, driven by a combination of rising expectations for larger interest rate cuts and growing concerns over China’s economic outlook. The kiwi fell as much as 0.7% to 60.4 US cents on Wednesday, marking its position as the worst-performing currency among developed markets for the month. This decline underscores the economic pressures both domestically and from abroad, with challenges coming from New Zealand’s internal monetary policies and its dependency on China as a trading partner.
The slide in the kiwi can be attributed to two primary factors: first, the sharp fall in New Zealand’s inflation rate in the third quarter, which heightened expectations that the Reserve Bank of New Zealand (RBNZ) will continue aggressively easing monetary policy. Second, the currency is also suffering from weakening investor sentiment toward China, New Zealand’s largest trading partner, as economic concerns in China mount.
The annual inflation rate in New Zealand fell to 2.2% in the third quarter, moving within the RBNZ’s target band for the first time in over three years. This sharp deceleration in inflation has fueled speculation that the central bank will push forward with larger rate cuts to stimulate an economy that has struggled to rebound. Last week, the RBNZ cut rates by half a percentage point, and many analysts believe that further cuts are imminent as the central bank attempts to stave off a second recession in under two years.
At the same time, the kiwi has been pressured by concerns about China’s slowing economy. The yuan, an anchor currency for the Asia-Pacific region, has been weakening in recent weeks, while Chinese equities have also slumped. China’s fiscal stimulus efforts have so far failed to restore investor confidence, and the ripple effects of a slowing Chinese economy are being felt in New Zealand, particularly as China remains a key importer of New Zealand goods like dairy products and meat.
The RBNZ has been taking decisive action to address New Zealand’s faltering economy, which has been grappling with sluggish growth, a rising unemployment rate, and a prolonged housing market downturn. After implementing a 50-basis-point cut last week, many traders and analysts are anticipating even more aggressive easing measures in the near future.
Data released on Wednesday added to the speculation, as the lower-than-expected inflation rate gave the RBNZ more room to maneuver in cutting rates without the risk of further stoking inflationary pressures. Traders have already priced in a more than 40% chance of a 75-basis-point rate cut at the central bank’s November 27 meeting, according to Bloomberg data. Such a move would represent a bold step by the RBNZ, but it may be necessary given the challenges the economy faces.
Imre Speizer, a strategist at Westpac Banking Corp in Auckland, warned that the kiwi could dip below 60 US cents in the coming days, and potentially below 59 US cents if the RBNZ accelerates rate cuts. “Rate differentials are definitely working against the kiwi at the moment, especially as the Federal Reserve in the US appears to be slowing its rate-cutting trajectory,” Speizer said.
Indeed, the Reserve Bank of New Zealand’s aggressive stance contrasts sharply with that of the US Federal Reserve, which has been scaling back its pace of rate cuts as the US economy shows surprising resilience. This widening gap in yield between New Zealand and the US makes the kiwi less attractive to investors, further contributing to the currency’s decline.
While domestic economic concerns are driving much of the downward pressure on the kiwi, external factors — particularly those related to China — are exacerbating the situation. China is New Zealand’s largest trading partner, and any slowdown in the Chinese economy has the potential to create significant headwinds for New Zealand’s export-driven economy.
China’s economic slowdown has deepened over the course of 2024, with weaker-than-expected growth figures, a slowing property market, and lackluster consumer spending all raising alarms among investors. Despite Beijing’s attempts to shore up the economy with fiscal stimulus measures, these efforts have so far failed to deliver the kind of robust growth that markets were hoping for.
The yuan has been weakening in response to these concerns, falling alongside mainland Chinese stocks as investor confidence continues to dwindle. For New Zealand, which exports a significant amount of dairy, meat, and other goods to China, this is troubling news. As the Chinese economy slows, demand for New Zealand’s exports could soften, putting further pressure on the kiwi.
David Croy, a rates strategist at ANZ Group Holdings Ltd, noted that a 75-basis-point cut by the RBNZ is becoming increasingly plausible as the central bank looks to get ahead of the challenges posed by a weakening China. “The RBNZ will likely take the wins where it can, and they aren’t afraid to be bold in the face of these challenges,” Croy said.
Another major factor weighing on the RBNZ’s decision-making process is the state of New Zealand’s housing market and labor market. The country has been experiencing a prolonged housing market downturn, with house prices falling for the seventh straight month. This has eroded consumer confidence and led to a slowdown in household spending, which has had knock-on effects throughout the broader economy.
Meanwhile, unemployment has also been creeping higher, with the latest figures showing that the jobless rate has risen to its highest level in more than three years. This is a significant concern for the RBNZ, as it indicates that the tight monetary policy of recent years — aimed at controlling inflation — may have come at the cost of weakening the labor market.
The central bank’s decision to accelerate rate cuts is largely a response to these domestic pressures. By lowering borrowing costs, the RBNZ hopes to stimulate economic activity, encourage spending, and prevent the economy from slipping into another recession.
The kiwi’s struggles are also set against the backdrop of the broader global market environment, where the US dollar continues to outperform most other currencies. The Federal Reserve has been adjusting its monetary policy in response to robust US economic performance, leading to a relative strengthening of the US dollar. This has further widened the gap between the kiwi and the greenback, making the New Zealand dollar even less attractive to investors.
Earlier this year, there were expectations that the Federal Reserve would continue with aggressive rate cuts in response to fears of a potential economic slowdown in the US. However, recent data has shown that the US economy has remained more resilient than anticipated, with strong job growth, steady consumer spending, and moderate inflation. As a result, the Fed has slowed the pace of rate cuts, and some traders have even scaled back expectations for further easing altogether.
This shift in the outlook for US monetary policy has made the kiwi less appealing on a relative basis, as investors can now earn higher returns by holding US dollars. The narrowing yield advantage between the two currencies is one of the key factors contributing to the kiwi’s recent underperformance.
The kiwi remains highly uncertain. Much will depend on the actions of the RBNZ in the coming months and whether the central bank opts for further aggressive rate cuts to support the economy. If the RBNZ does deliver a 75-basis-point cut in November, as some traders are anticipating, the kiwi could fall further, potentially testing the 59 US cents level or lower.
At the same time, the situation in China will continue to play a crucial role in shaping the kiwi’s trajectory. If Beijing is able to implement more effective fiscal stimulus measures and restore investor confidence in the Chinese economy, this could provide some relief for the kiwi. However, if China’s slowdown deepens, New Zealand’s export sector could face additional challenges, leading to further weakness in the currency.
The kiwi’s recent decline is the result of a complex interplay of domestic and international factors. While the RBNZ’s aggressive rate-cutting approach has been a key driver, concerns about China’s economic slowdown and the relative strength of the US dollar are also contributing to the currency’s underperformance. As New Zealand navigates these challenges, the central bank’s actions and the global economic environment will remain critical in determining the future path of the kiwi.
