NZ dollar sinks as dire data flags risk of jumbo rate cut

By Wayne Cole

SYDNEY, Sept 18 (Reuters) - The New Zealand dollar sank on Thursday after a strikingly weak reading on the economy pushed yields sharply lower as markets ramped up wagers for bigger rate cuts ahead.

Its Australian counterpart also eased as jobs data surprised on the downside, adding to the case for another rate cut locally, though likely not until November.

The kiwi dollar slid 0.9% to $0.5912 NZD=D3, well off an overnight peak of $0.6007. Support comes in at $0.5833.

The Aussie dollar dipped 0.2% to $0.6635 AUD=D3, having touched an 11-month top of $0.6707 overnight when the U.S. Federal Reserve cut rates. Support now lies at $0.6625.

New Zealand's economy shrank 0.9% in the June quarter, when analysts had looked for a drop of only 0.3%, with manufacturing, construction and exports all dragging on growth.

Markets quickly moved to price in 31 basis points of rate cuts from the Reserve Bank of New Zealand at its next meeting on October 8, compared to 23 basis points before the data.

That implies a 100% chance of a quarter-point reduction to 2.75%, and a 24% chance of an outsized half-point cut. The RBNZ had already flagged the likelihood of reaching 2.5% by year end, with the speed to be determined by the flow of data. 0#NZDIRPR

Investors suspected the central bank might even have to go further, with 68 basis points of easing implied by the middle of 2026.

"The RBNZ had previously indicated that they were interested in delivering more stimulus to provide guardrails against a deeper or more prolonged period of economic stagnation," said Kelly Eckhold, chief New Zealand economist at Westpac. "That argument only grew stronger today."

"We now think the RBNZ will cut 50bp in October and 25bp in November, previously we expected 25bp cuts at both of those meetings."

Two-year swap rates NZDSM3NB2Y= slid 16 basis points to 2.6381%, hitting the lowest since early 2022. That shift saw the Aussie climb 0.7% on the kiwi to reach its highest since October 2022 at NZ$1.1240 AUDNZD=R.

Australian data showed employment fell 5,400 in August, when analysts had looked for a rise of 21,500. The jobless rate held at 4.2% as expected.

Markets still imply only a 20% chance the Reserve Bank of Australia will cut its 3.60% cash rate at the next meeting on September 30, and a 70% probability of a quarter-point move at the following meeting in November.