NZD/USD Analysis: Kiwi Declines Amid Deep Recession Concerns and RBNZ Rate Cut Expectations

• New Zealand experiences a significant economic contraction of 1% in Q3, following a revised decline of 1.1% in Q2.
• Market speculation indicates a 91% probability of an additional 50bps rate cut by the Reserve Bank of New Zealand (RBNZ) in February.
• The NZD/USD exchange rate tumbles over 2%, registering its steepest drop since May 2023.
• The Kiwi is trading around 0.5600, with the possibility of dropping to the October 2022 lows of 0.5515.

Economic Overview

The latest report on New Zealand's economy reveals a severe recession, raising concerns about the necessity for further interest rate cuts by the RBNZ. This grim economic outlook, compounded by a hawkish stance from the Federal Reserve, has inflicted significant damage on the NZD/USD currency pair, which is now at levels not seen in over two years.

Severe Contraction of the Kiwi Economy

The Q3 GDP figures for New Zealand are stark, indicating a 1% contraction following an earlier revised drop of 1.1% for Q2, which was initially reported as a mere 0.2% decline. Analysts had anticipated a smaller contraction of 0.2%, aligning with the forecasts from the RBNZ. The actual year's decline is not just 0.4%, but a staggering 1.5%. Considering the rapid population growth, this indicates a deeply entrenched recession.

GDP per capita has plummeted by 1.2% in Q3, marking the eighth straight quarter of decline in this metric. Additionally, real gross national disposable income fell by 0.8%, signaling a deteriorating landscape for living standards.

RBNZ Under Increasing Pressure

The dismal economic performance is causing traders to increase their bets that the RBNZ will implement more substantial rate cuts, building on the 50bps cuts made in October and November, with a staggering 91% likelihood of another cut in February. Markets are pricing in a total of 100bps of cuts by 2025. What once appeared to be a reasonable expectation now raises concerns that the RBNZ may need to take more drastic measures.

With the Federal Reserve tightening its own stance—removing 50bps of easing from its 2025 forecast—the NZD/USD pair has reacted sharply, plummeting over 2% on Thursday. This represents the most considerable one-day decline since May 2023, with the Kiwi now trading at levels unseen since October 2022, resulting in an outlook that appears increasingly grim.

NZD/USD Facing Major Challenges

The breakdown of wedge support has accelerated losses for the NZD/USD pair, targeting 0.5600 as a critical level. If this support fails, a further decline to 0.5515—the lows recorded in October 2022—could be on the table. Conversely, resistance around 0.5754 could be encountered, though a near-term rebound back to this level seems unlikely at this stage.

Technical indicators such as the RSI (14) and MACD show bearish momentum, though the RSI indicates oversold conditions on the daily chart, creating a potential for a sudden retracement. Traders should remain vigilant for clear signals of a market bottom on shorter timeframes, although the dominant sentiment appears to favor selling into rallies in the near term.