The RBNZ Chief Economist, Conway, says the full impact of US tariffs is unknown. The central bank is constantly reviewing data. He believes these tariffs could hurt business investment and reduce inflation in New Zealand.

Global Economic Outlook

Conway expects a slower global economy and less demand due to the tariffs. The Q2 CPI data met RBNZ’s predictions, and if inflation keeps falling, there may be more rate cuts. New data shows that New Zealand’s economic growth slowed in the June quarter. According to Mr. Conway’s outlook, the Reserve Bank of New Zealand is clearly leaning towards lowering interest rates. His concerns about tariffs weakening global demand suggest that the next move for the Official Cash Rate, currently at 5.50%, will likely be downward. Derivative traders should prepare for declining rates, possibly through interest rate swaps or going long on 90-day bank bill futures.

Currency Market Implications

Conway’s comments hint at a weaker New Zealand dollar ahead. Lower interest rates make a currency less attractive. We should explore strategies that benefit from a drop in the NZD/USD pair, which has been struggling to stay above 0.6200. This might involve buying put options on the currency to hedge against or profit from a decline. His statements about reduced business investment and slower growth are already showing up in the data. Stats NZ has confirmed a contraction of 0.1% in the March 2024 quarter, marking a technical recession. We expect more market volatility. Buying options contracts, instead of outright futures, could be a smart move in this uncertain environment, as their value rises with market fluctuations. This situation is similar to the lead-up to the RBNZ’s unexpected 50-basis-point rate cut in August 2019, which was influenced by global trade concerns and slowing domestic momentum. After that decision, the kiwi dollar dropped sharply against major currencies. We might see a similar, though possibly more gradual, reaction in the currency markets in the coming weeks as expectations for rate cuts grow stronger. Create your live VT Markets account and start trading now.

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