New Zealand is a relatively small country. It has a population of almost 5 million and a GDP of more than $205 billion. It is an important country because of its key trading partners and its location. As a key trading partner with China and Australia, the country is often viewed as a proxy of the two economies.
Today, the kiwi declined to the lowest level since October last year after the Reserve Bank of New Zealand (RBNZ) delivered its interest rates decision. As investors had expected, the bank lowered rates by 25 basis points to 1.50%. This was the lowest level the rates have been ever. In the March meeting, the bank had said that a rate cut would be on the table if the economy continued to show weakness. This was confirmed by the bank’s governor, Adrian Orr in a Bloomberg interview last week.
In the accompanying statement, the bank said that it was concerned about the pace of global growth. This demand has lowered the demand for the goods sold by New Zealand. The bank also blamed the slowdown in the domestic economy. This was attributed to the lower growth in exports, reduced population growth, lower net immigration, and the continued softness in the housing sector. In addition, the weak operating environment has led to lower housing spending. Companies too have continued to experience tighter profit margins and competition for resources. Most importantly, the companies have faced the challenge of lack of access to skilled labor.
All these issues have led to the cooling of the country’s economy. In 2018, the economy slowed to 2.3% from 3.4% in the previous year. The recent data show that the country’s inflation rate declined to 1.5% in the first quarter. At the same time, hiring declined unexpectedly. The unemployment rate remains at historical lows. In the statement, the bank added that:
A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand’s largest trading partners. The Committee agreed that the projections adequately captured the observed global slowdown and its impact on domestic employment and inflation.
In response to the RBNZ, the NZD/USD pair declined to a low of 0.6525. This was the lowest level since October last year. The price then moved higher to a high of 0.6587. On the chart below, this price is below the 21 and 50-day exponential moving averages. The MACD has declined sharply and remained below the neutral line. The pair might continue to move lower as the RBNZ continues to sound more dovish.