New Zealand to join global recession club as RBNZ readies next move – Forex News Preview

New Zealand to join global recession club as RBNZ readies next move – Forex News Preview

Raffi Boyadjian, XM Investment Research Desk

New Zealand will report GDP numbers for the second quarter on Thursday (Wednesday, 22:45 GMT) and will be the last of the major advanced economies to do so. Currently, the United Kingdom is at the bottom of the Q2 growth table and Australia is at the top. The GDP data is likely to show New Zealand falls somewhere in the lower range of that table, taking a bigger hit than its aussie neighbour. But with a recovery now underway, the real point of interest for investors is whether the South Pacific economy can get by without the need for negative interest rates.

Counting the cost of lockdowns

Like most countries battling the coronavirus pandemic, New Zealand’s main weapon against the disease was a nationwide lockdown and the economic price of this costly policy will be laid bare in Thursday’s GDP print. New Zealand’s economy is expected to have shrunk by the most on record, with analysts predicting a 12.8% quarterly contraction in the three months to June. The year-on-year decline is projected to have accelerated to 13.3%, following a 1.6% q/q drop in the prior quarter.

In response, the country’s central bank, the Reserve Bank of New Zealand, slashed the cash rate to 0.25%, launched a large scale asset purchase (LSAP) programme and offered a term lending facility to local banks. Combined with an equally powerful fiscal stimulus, policymakers were able to keep the economy afloat and minimize the hardship on households and businesses, not to mention facilitate the post-lockdown rebound.

Is New Zealand headed for a double-dip recession?

But that recovery is now under threat as New Zealand was forced into a second lockdown in August after the first locally transmitted COVID-19 cases were detected in Auckland, having gone more than 100 days without any such transmissions. The new restrictions are due to be lifted soon but the damage may already be done, with several indicators pointing to a clear deterioration in economic activity in recent weeks.

Business sentiment dipped in August for the first time since April according to the ANZ Bank survey, manufacturing growth is slowing, and credit card spending fell by 7.9% during the month, partially reversing the bounce from the first lockdown. Other data such as freight traffic also signal reduced activity since tighter controls were reintroduced.

RBNZ is expanding its toolbox

With increasing signs that the recovery hit a major stumbling block in August, there’s a risk New Zealand’s virus turnaround will lag other countries’ in the third quarter and this may well end up being what pushes the RBNZ to take more drastic action to support the economy. New Zealand’s recovery prospects were already looking somewhat discouraging given that the government’s tough virus stance has meant the country’s important tourism sector remains closed off to the rest of the world.

The uncertain outlook is definitely something keeping RBNZ policymakers up at night and they have not been shy about considering the use of unconventional tools to fight the unprecedented economic slump. Speaking earlier this month, Governor Adrian Orr gave his strongest hint yet that additional stimulus is on the cards and that the Bank was readying a new set of tools. Whether one of those tools is negative interest rates remains to be seen but markets already foresee such a move by next spring.

Too early for kiwi rally to end?

Should the RBNZ begin to flag negative rates more explicitly, the kiwi rally’s days may be numbered. The New Zealand dollar hit a 13-month peak of $0.6788 on September 2 as market participants continue to shrug off concerns about the global recovery, the likelihood of a vaccine before the year-end and political risks in the United States.

While the Q2 GDP data won’t have a direct bearing on the RBNZ’s decision, a weaker-than-expected reading would only add to the speculation, pressuring the kiwi. Downside moves from disappointing numbers could spark a short-term correction in kiwi/dollar all the way down to the 50-day moving average at $0.6627. However, a surprisingly strong report could lift the pair above the September top of $0.6788, opening the way for the next major target at the 123.6% Fibonacci extension of the January-March downtrend at $0.7059.

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