NZD/USD: country's GDP and Fed meeting


As New Zealand Finance Minister Grant Robertson recently stated, "New Zealand's economy is strong and resilient". In his opinion, in the country's economy at the moment "there is a high level of demand". At the same time, it (demand) cannot be fully satisfied due to a disruption in supply chains, which is "largely due to global factors".

Economists expect that the country's GDP in the 1st quarter grew by +0.6% (+3.3% y/y) against growth of +3% q/q (+3.1% y/y) in the Q4 of 2021, despite the fact that the wave of the Omicron strain put pressure on the economy.

Data on GDP (along with data on the labor market and the level of inflation in the country) directly influence the decisions of the New Zealand central bank on monetary policy. Therefore, today's publication (at 22:45 GMT) of the country's GDP data is very important for economists and RBNZ leaders, as well as for market participants trading NZD.

At its May 25 meeting, the RBNZ raised its interest rate to 2.0% from 1.5% after a similar hike in April. According to the forecast of the central bank, the key rate will reach 3.4% by the end of this year and 3.9% in April-June 2023. Earlier, the RBNZ forecast that the rate would be 2.2% in the last quarter of this year and peak around 3.4% in 2024.

"Members (of the Committee) agree that a larger and faster increase in the official interest rate will avoid serious costs to employment and the economy as a whole as a result of high inflation", the RBNZ said in an accompanying statement.

Consumer prices in New Zealand jumped by 6.9% (on an annual basis) in the 1st quarter, which was the strongest increase in the last 30 years.

If today's 1Q GDP report turns out to be strong, beating economists' forecasts, then there will be fewer obstacles for the RBNZ to raise the interest rate again at its next meeting on July 13. Thus, the RBNZ will continue to follow the lead of the Fed and other major global central banks in implementing its most aggressive tightening cycle in decades.

Under normal economic conditions, an increase in the interest rate usually leads to the strengthening of the national currency. However, the current economic situation is far from normal, given the problems caused by massive monetary and fiscal stimulus, tangled global supply chains, and rising prices for energy and other commodities following Russia's military operation in Ukraine.

However, if today's New Zealand GDP report beats the market's expectations, then we should expect the NZD to strengthen.

Yet the focus of investors today is the Fed meeting, which began on Tuesday, and will end today with the publication (at 18:00 GMT) of the decision on interest rates. According to Fed Chairman Powell, the 0.50% rate hike at the June and July meetings is already priced in. Market participants will be interested in the question of what the Fed will do if inflation in the US continues to accelerate. Will the Fed be able to move to a more aggressive policy in this case. Some world media are already raising their assessment of the prospects for a 75 bp rate hike. This forces market participants to reconsider their expectations towards further rate hikes, while the yield of US bonds continues to grow. Recently, there has also been increased talk in the market that the Fed could raise by 100 bp at once, although this now seems unrealistic given the slowdown in the US economy: according to a report by the US Bureau of Economic Analysis, published at the end of the previous month, GDP in the 1st quarter decreased by -1.5% per annum, and not by -1.4%, as previously reported (in the previous 4th quarter, GDP grew by +6.9%, by +2.3% in 3th quarter, in the 2nd quarter of GDP - by +6.7%, in the 1st quarter of 2021 by +6.3%, and the forecast for the 1st quarter of 2022 assumed GDP growth by +1.1%).

In addition, according to revised data from the Bureau of Economic Analysis, companies’ profits in the 1st quarter fell by 2.3% after rising by 0.7% in the previous three months, which was the first drop in five quarters.

As for the NZD/USD, for the third month in a row it has been trading in the bear market zone, remaining below the key resistance levels 0.6865, 0.6810, 0.6725 and maintaining a negative trend.