New Zealand Dollar Soars on Strong Chinese data

The New Zealand dollar has surged on Monday. In the North American session, NZD/USD is trading at 0.5801, up 1.0% on the day. Earlier, NZD/USD rose as high as 0.5805, its highest level since Dec. 12.

The New Zealand dollar received a huge boost today from better-than-expected data out of China. Industrial production remained strong with a gain of 5.9% y/y in January-February, lower than the December gain of 6.2% but above the market estimate of 5.3%.

Retail sales in China climbed 4% in January-February, up from 3.7% in December and in line with expectations. New Zealand's economy is heavily dependent on China, which is New Zealand's largest trading partner.

New Zealand's service sector has slipped into contraction. The Services PMI dropped in February to 49.1, down from 50.4 in January. Services had been a prolonged depression, recording 10 consecutive readings below the 50 line, which separates contraction from expansion. New orders and employment contracted and a majority of the surveyed services managers are pessimistic about economic conditions.

Somewhat surprisingly, the manufacturing sector is outshining services. The Manufacturing PMI rose to 53.9 in February, up from 51.4 a month earlier. Prior to that, manufacturing was in decline for almost two years.

New Zealand's economy has sputtered and posted two consecutive quarters of negative growth, which technically is a recession. The economy shrank by 1.1% q/q in Q2 2024 and 1.0% q/q in Q3 2024. Both releases were lower than expected. The Reserve Bank of New Zealand has aggessively cut interest rates and the economy is expected to rebound, with a market estimate of 0.4% q/q.

The Reserve Bank of New Zealand chopped rates by 50 basis points in Febuary, bringing the cash rate to 3.75%. This marked a third straight cut of 50 bps and the next meeting is on April 9. There are no major New Zealand releases ahead of the rate meeting and the markets have priced in a 25-bps cut at 75%.