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The Reserve Bank of New Zealand (RBNZ) cut interest rates by 25 basis points from 3.25% to 3.00% this week and forex traders reacted by pushing the Kiwi higher. What’s in the world is going on? Why did forex traders react that way? Is New Zealand’s economy doing okay? Well, gear up, read up, and find out.


New Zealand’s trade balance in June is back in the red (-60M actual v.s. 371M previous) after 5 months of printing a trade surplus, which is a very disappointing development.

NZ trade

It gets even worse because the Global Dairy Trade price index has been slumping for 9 consecutive auctions, dragging the index to its lowest point since 2008. The latest reading saw a depressing 10.7% drop, which is the largest drop since April 2015. ANZ attributed the decline to “high global production, lacklustre demand from China and the continued bad on dairy imports into Russia.”


For newbie forex traders who are just tuning in, animal products, including dairy products, account for a very large chunk of New Zealand’s export-dependent economy. Fresh cheese, butter, and concentrated milk and cream, for example, contributed around 25% of New Zealand’s exports back in 2013.

New Zealand also exports metals such as iron and aluminum, and the data ain’t too good since ANZ’s commodity price index for June reported that aluminum prices were down by 6.4%. Heck, the ANZ’s commodity price index itself fell for the third consecutive month, slumping by 3.1% in June.

Consumer Sentiment

The Westpac: McDermott Miller New Zealand Consumer Confidence Index (CCI) for Q2 2015 slid down by 4.2 points to 113, but it’s still in optimistic territory. According to the report, consumers were confident that good economic times are coming soon due to “effective government economic policy.” Fascinating. Although the fact that CCI dropped a bit is probably a clue that consumers are beginning to lose their faith in the “effective government economic policy.”

NZ consumer confidence

Q2 2015 employment confidence also fell 5.8 points, but it’s still optimistic at 102.8. All is not good, though, since this is the lowest level in 7 quarters. Interestingly enough, public sectors are already pessimistic (96.1) while private sector employees are still clinging on to their optimism (107.6).

Business Conditions & Sentiment

Businesses are feeling a bit glum in New Zealand since ANZ’s business confidence survey for June is finally back in negative territory (-2.3 actual v.s. 15.7 previous) for the first time since February 2011. A closer look at the components of the report shows that the agricultural sector was the most pessimistic at -28.9, most likely because dairy product prices have been on the decline.

NZ Business Confidence

The manufacturing sector was also pretty downbeat with a reading of -16.9. All sectors were optimistic in terms of investment, except for the agricultural sector since it printed a -15.5 reading. That’s probably because it makes no sense for an investor to invest his hard-earned moolah on a sector that is seeing more competitors and shrinking demand.

The New Zealand Institute of Economic Research (NZIER) also released its own report and it followed the ANZ’s downward trajectory, although its readings weren’t as pessimistic since the actual reading printed a 5.0 (23.0 previous).


Q2 2015 CPI saw some improvement, rising by 0.4% after dipping by 0.3% last quarter. Surprisingly enough, the primary driver for inflation was the transportation group due to an 8.8% increase in petrol prices and a 11.0% increase in diesel prices, thanks to higher crude oil prices and a weak Kiwi.

The main drag to inflation was the communication group which printed a 1.9% decline in telecommunication services “influenced by price falls and better value plans.” Food products were also a major drag, thanks particularly to an 8.7% drop in seasonal fruit prices.


Summary & Potential Effects on the Forex Market

Well, it looks like the the RBNZ made the right move in cutting rates since trade data, in particular, is rather distressing and hints at lower GDP growth in the future.

Okay, we get it Forex Gump. But if growth prospects are bad, businesses are gloomy, and consumers are beginning to lose confidence, then why did the Kiwi jump after the rate cut?

NZD/USD 1-hour Forex Chart
NZD/USD 1-hour Forex Chart

Most traders had already been expecting a 25 basis point rate cut, but there were also talks among forex market analysts of a possible 50 basis point rate cut since it looks like New Zealand needs at least two rate cuts before the year ends. HSBC chief economist Paul Bloxham, for example, said that “a straight 50 bps cut is now a real possibility.” Westpac economists were also conjecturing that there “is a clear risk of the RBNZ instead cutting by 50 basis points.”

I guess you could say it was another case of “buying the rumor and then selling the news.” In this case, forex traders were shorting the Kiwi on rumors of a 50 bps rate cut, and then closed shop when the rumors were invalidated.

So… where do we go from here? Well, perhaps forex traders who shorted the Kiwi on the 50 bps rumor have already been squeezed out since most Kiwi pairs are back to their pre-rate cut levels. And based on the long-term fundamentals and currently available data, it seems like the Kiwi will be meeting more sellers than buyers. After all, the RBNZ did say in their most recent statement that “some further easing seems likely.”