The New Zealand Dollar began rallying against the basket of currencies representing developed economies on Thursday after Statistics New Zealand reported an impressive economic expansion during the second quarter. The report contradicted the Reserve Bank of New Zealand’s (RBNZ) worries that the economy is hitting the brakes and that an interest rate cut might be necessary for the months ahead.
New Zealand’s economy expanded by 1% during the quarter ended June, up from 0.5% at the start of 2018. RBNZ had anticipated the economy to expand by only 0.5%. The economic data bolstered the annualized pace of economic growth for 2Q18 to 2.7%, from 2.6%. Financial markets were expecting the annualized pace of growth to decline to 2.5%.
The statistical organization also revealed that 15 out of 16 industries grew during the recent quarter, with the mining sector being the only disappointment. It is the best quarterly performance in nearly two years with the services industry outperforming all other sectors.
Michael Gordon, an economist at Westpac, said: “Not only was the overall result stronger than expected, the details were more encouraging for the economy’s growth prospects going forward. Growth was shared widely across the economy, and the one-offs – in areas such as electricity, transport, and government services – weren’t as big as we expected, which means there’s less risk of an unwind in the next quarter.”
Currency markets worry about economic growth because it reflects increasing and decreasing demand for goods within the economy which has a direct impact on the consumer price inflation (CPI), which decides the direction of interest rates.
The interest rate is raised or slashed as a reply to changes in CPI. However, it affects the currency exchange rate because of its influence on capital inflows. Joseph Capurso, a senior currency strategist at Commonwealth Bank of Australia, believes that the RBNZ may not raise interest rates immediately. However, it would certainly avoid slashing interest rates further. At the end of the August policy meeting, RBNZ officials said that the chances of the interest rate cut had increased this year.
Capurso said: “NZD/USD is likely to lift further over the coming days as interest rate markets continue to adjust marginally higher. It would appear appropriate that the OIS market reduces the possibility of an RBNZ rate cut because the guidance given by the RBNZ governor surrounding the risk of a rate cut was based on the chance of New Zealand GDP plummeting.”
The Antipodean currencies (Aussie & Kiwi dollar) got another boost yesterday when the Chinese Premier, Li Keqiang, said that China would not allow its currency to weaken further to offset Trump’s tariffs announced earlier this week. China’s renminbi has a direct correlation with New Zealand and the Australian dollar as these economies are very much interlinked.
The kiwi bond market is also pricing an increasing possibility of a rate hike in the coming months. As the risk appetite increased, the greenback has started weakening.
Technically, the NZDUSD pair has received support at 0.6565. The oscillator of the moving average is in the positive region, and we are expecting the currency pair to move up in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
