GDP numbers for New Zealand will be watched at 22:45 GMT on Wednesday as the Pacific nation’s economy is expected to have returned to growth in the first quarter. The recent hawkish shift by the Reserve Bank of New Zealand does not appear to have done too many favours for the local dollar, which is currently wallowing near two-month lows against its US counterpart. However, a solid expansion in Q1 could remind investors that the recovery is back on track, putting RBNZ tapering expectations back in the driving seat for the kiwi.
Surprise Q4 weakness has not stopped RBNZ’s taper plans
New Zealand’s economy unexpectedly shrank 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 anticipated as GDP had rebounded impressively in the third quarter, recouping the pandemic losses before other major advanced economies.
Nevertheless, the RBNZ forged ahead at its last meeting with flagging a possible exit from pandemic-era policies as early as 2022. The Q1 GDP data could be pivotal in determining whether the recovery is “evolving broadly as anticipated” as this is the condition the RBNZ has laid out for eventually raising the official cash rate (OCR).
GDP growth likely bounced back in Q1
Analysts are forecasting quarterly growth of 0.5% for the January-March period, which would only partially make up for the 1.0% contraction in Q4. Year-on-year, GDP is expected to have expanded by 0.9%. While those numbers may not be anything spectacular, the RBNZ’s own estimate is that the economy likely dipped into a technical recession in Q1 so any reading above zero would not be seen as derailing policymakers’ stimulus exit strategy.
However, looking at the direction markets have taken since the last RBNZ meeting on May 26, a positive but unspectacular growth figure may not be enough to revive the rally in either the kiwi or in New Zealand government bond yields. New Zealand’s 10-year yield has retreated from a post-meeting peak of 1.930% on May 27 to a low of 1.665% brushed earlier today.
Limited boost to kiwi from more hawkish RBNZ
The growing belief by investors that the inflationary burst being observed around the globe right now will be temporary is primarily behind this notable pullback in bond yields. But given that there aren’t many central banks that are ready to take those first crucial steps towards tapering, the drop in New Zealand government bonds and subsequent weakness of the kiwi are all the more peculiar.
It also indicates that only a very strong GDP print could potentially have the capacity to rattle investors and send yields and the New Zealand dollar in the opposite direction.
Eyeing the $0.72 level
Should GDP growth confound even the most optimistic expectations, kiwi/dollar could climb back towards its 50-day moving average (MA) just below the $0.72 level. However, further gains towards the 61.8% Fibonacci of the February-March downleg at $0.7264 and the $0.73 handle would be an uphill struggle without a weaker greenback to complement the move.
Nearest support can be found at the $0.71 mark. Should a softer-than-forecast expansion push kiwi/dollar below it, the 200-day MA, currently at $0.7038, would be the next major target for the bears.
