GDP growth for New Zealand will be watched on Wednesday at 22:45 GMT, as the Pacific national economy is expected to return to growth in the first quarter. The recent little change by the Reserve Bank of New Zealand doesn’t seem to have done too many favors for the local dollar, which is currently rolling near two-month lows against its U.S. counterpart. However, a solid expansion in Q1 could remind investors that the recovery is back, and RBNZ has reduced expectations in the steering seat for the kiosk.
A surprising Q4 weakness did not stop RBNZ’s narrow plans
New Zealand’s economy unexpectedly declined in the fourth quarter of 2020, as mini-virus outbreaks and slower growth elsewhere in the world weighed on output. Some loss of steam was predicted as GDP rebounded impressively in the third quarter, recovering from the pandemic losses ahead of other major advanced economies.
However, RBNZ went ahead at its last meeting with marking a possible exit from pandemic-era policies as early as 2022. Q1 GDP data could be pivotal to determine whether the recovery is “evolving broadly as anticipated” as this is the RBNZ condition arranged to eventually raise the official monetary rate (OCR).
GDP growth is likely to rebound in Q1
Analysts forecast quarter-on-quarter growth of 0.5% for the January-March period, which would only partially offset the 1.0% contract in Q4. Year-on-year, GDP is expected to have grown by 0.9%. While those numbers may not be anything spectacular, RBNZ’s own estimate is that the economy is likely to fall into a technical recession in Q1, so any reading above zero would not be seen as rejecting stimulus exit from politicians.
However, looking at the direction the markets have taken since the last RBNZ meeting on 26 May, a positive but disproportionate growth figure may not be enough to revive the build-up either in the kiwi or in the New Zealand government bond yield. New Zealand’s 10-year yield retreated from a post-meeting peak of 1.930% on 27 May to a low of 1.665% earlier today.
Limited acceleration to kiwi of more accelerating RBNZ
The growing belief of investors that the inflation boom observed around the world will now be temporary is mainly behind this remarkable withdrawal of bond yields. But given that there are not many central banks ready to take those first decisive steps towards a downturn, the fall of New Zealand government bonds and subsequent weakness of the kiwi are all the more particular.
It also indicates that only a very strong GDP print could catch investors and send yields and the New Zealand dollar in the opposite direction.
Looking at the $ 0.72 level
If GDP growth would confuse even the most optimistic expectations, kiwi / dollar could climb to its 50-day moving average (MA) immediately below the $ 0.72 level. However further gains to the 61.8% Fibonacci from the February-March decline at $ 0.7264 and the $ 0.73 handle would be an upward struggle without a weaker green back to complete the move.
Closest support can be found at the $ 0.71 mark. If a softer-than-expected expansion pushed a kiwi / dollar below it, the 200-day MA, currently at $ 0.7038, would be the next main target for the bears.