New Zealand GDP Preview: Room for a positive surprise, NZD/USD may advance, pending market mood

New Zealand is expected to report a drop of 1% first-quarter economic output.
Upbeat Australian figures imply a better outcome.
NZD/USD has room to rise, but the reaction also depends on the market movement.

Yohay Elam FXStreet

New Zealand has been a success story in combating coronavirus – passing 24 days without new cases until two popped up in mid-June. Gross Domestic Product figures released early on Thursday are for the first quarter that ended back in March – but they remain relevant for the economy moving forward and for NZD/USD.

Economists expect the economy of the South Pacific nation to fall by 1%, the first contraction since the third quarter of 2010 – nearly 2010. A drop of 1% would match the crash in the first quarter of 2009.

The case for better GDP figures

Looking to the west – to Australia – is where the answer lies. The land down under reported a squeeze of only 0.3% in the first quarter and New Zealand's contraction could be similar. The antipodean neighbors are both developed economies where many work from home. Australia exports metals and New Zealand's leading product is milk.

The economic shock from coronavirus in China may have paralyzed demand for building materials but the consumption of food has not dropped. That goes far enough to provide hopes that New Zealand's GDP figures may even beat Australia's.

On the other hand, the lockdown imposed on Auckland was much stricter than that in Sydney. Australia's states enacted different policies while New Zealand's centralized government went hard and fast. The better results Jacinda Arrdern's government has over Scott Morrison's – fewer COVID-19 deaths and infections – may only be felt in the economy in the second or third quarters.

Source: Financial Times

All in all, there is a good case for an economic squeeze that is softer than 1% projected, and that could boost the kiwi.

Will NZD/USD rally in that case?

The answer depends on the broader market mood. The kiwi is a "risk" currency that rises with stocks – such as Monday's Federal Reserve-fueled rally – and falls when equities struggle. Another round of adverse coronavirus news from America's Sun Belt could down NZD/USD.

The market mood at the time of the publication is likely to impact the reaction. An upbeat figure will compound a rally based on optimism, while a depressing GDP figure could exacerbate a sell-off of the kiwi based on global gloom.

If statistics surpass estimates but investors are downbeat, the increase could be muted. The same logic applies to a faster contraction in New Zealand, yet coming after another rally in stocks.

Conclusion

There is a case for New Zealand's first-quarter GDP to come out above the contraction of 1% projected. However, the full reaction in NZD/USD depends on the underlying market mood.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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