GDP Growth Data is Proof that the New Zealand Dollar Will be Hard to Pin Down

A below-expectation GDP reading for the second quarter of 2016 saw the NZ Dollar slip lower against its major competitors. But, this is still the fastest growing economy in the G10 currency complex and that says something about the outlook for NZD.

• Pound to New Zealand Dollar exchange rate (16/9/16): 1.8065
• New Zealand to US Dollar exchange rate (16/9/16): 0.7311
• Australian to New Zealand Dollar exchange rate (16/9/16): 1.0265

Strong economic growth will keep New Zealand's currency stronger-for-longer with any dips likely to prove temporary.

This is our key takeaway from Thursday the 15th September's news that the country's economy grew 0.9% in the quarter ending in June 2016.

This follows a 0.9 percent increase in the March 2016 quarter.

Year-on-year growth now stands at 3.6%, below the 3.7% forecast.

However, NZD did lose some ground as analysts had been forecasting a reading of 1.10%.

This is impressive growth by any standard, however, expectations were high leading into the data release and when it comes to currencies the beat or miss on expectations is what drives movement.

Hence, the New Zealand Dollar was seen lower against its major trading partners in the wake of  the publication.

Ahead of the release we reported ASB economist Jane Turner expected, “a whopping 1.2% lift in GDP over the quarter.”

Analyst Stephen Toplis at BNZ was even more bullish as he estimated the economy to have expanded 1.2% over the quarter. That’s 4.9% annualised and 3.7% higher than the level of activity reported for June 2015.

In the event, markets appear to have bid the NZD too high and are correcting accordingly.

That said, this is hardly a game-changing reading for the ever-strong NZ Dollar.

“Growth is strong enough to keep the RBNZ on hold this month and in any case we have argued there is a breakdown between rate expectations and the currency. We look for further NZD gains,” says Elsa Lignos at RBC Capital.

RBC Capital do however observe the pick-up as being housing-centric which may be hard to maintain.

Private consumption expanded a whopping 1.9% in Q2, lifting its annual growth to 4.0% - the swiftest in over four years.

Latest Pound / New Zealand Dollar Exchange Rates

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*Your Bank's Retail Rate	2.2328 - 2.242
**Independent Specialist	2.279 - 2.2883 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Looking ahead, the channel by which economic data will impact on the NZ Dollar is most likely via the central bank.

We know the RBNZ is keen to see a weaker NZD, as to ensure the country's export sector remains competitive.

As such, many see another interest rate cut coming.

"All up, annual growth is materially higher than the RBNZ believed at the August MPS. We continue to expect the RBNZ will cut the OCR to 1.75% in November," says ASB's Turner.

This may place a lid on on the NZD's near-term ambitions.

"But in light of strong GDP and dairy prices, the RBNZ may be more reluctant to cut the OCR below 1.75% next year after delivering one more cut in November," says Turner.

Therefore, if markets believe a November rate cut is the final in the series they may hardly bother pressing the sell button on NZD at all.