NZD recovers as GDP beats expectations

Summary:

• New Zealand Q2 GDP growth exceeds expectations boosting the NZ dollar

• China reportedly plans a broad import tax cut as soon as next month

• Shinzo Abe wins the ruling party leadership election

The NZ dollar is undoubtedly the largest market mover this morning responding to robust GDP growth in the second quarter. The NZ economy expanded at the fastest pace in two years bringing 1% QoQ growth compared to 0.5% registered during the first three months of this year. This number easily exceeded the median estimate pointing to growth of 0.8%. In annual terms from jumped from 2.6% (revised down from 2.7%) to 2.8% also beating the consensus of 2.5%.

GDP growth in the New Zealand’s economy beat expectations providing a boost to the NZ dollar. Source: Macrobond, XTB Research

Looking at the breakdown of the release one may notice that all sectors except mining saw an increase compared to the first quarter. Where did a fall in mining come from? The country’s statistical bureau pointed to an unplanned outage at New Zealand’s largest natural gas field after a leak was discovered in March. In case of broader categories we got a decline in only in next exports subtracting almost 2 percentage points from annual growth. Investment spending added 1.1 percentage points while household expenditure added 1.8 percentage points. While today’s numbers look encouragingly one cannot forget about the current stance of the Reserve Bank of New Zealand. The bank has signalled recently that a possible rate cut remains on the table amid a slump in business confidence. Hence we think that it is too early to change a medium-term stance on the NZ dollar despite a decent rebound we have seen of late. Looking at market-implied odds for a rate change in New Zealand one may spot that until February market participants price in a rate cut in almost 10% assigning the negligible probability to a rate hike at the same time.

The NZDUSD is soaring this morning (up more than 0.5%) breaking the medium-term trend line. Bulls may want to continue marching north toward a resistance localized at around 0.6715. Even as the ongoing move looks promisingly from a technical point of view, and the NZD remains remarkably oversold at the same time one needs to remain cautious given the latest deterioration in macroeconomic data. Source: xStation5

The second thread we want to bring up pertains to the trade war between China and the US. Namely, the former is reportedly planning to cut the average tariff rate that it charges on imports from the majority of its trading partners as soon as October, according to Bloomberg. We have yet to be provided with explanations from the Ministry of Commerce whether a possible reduction embraces the United States or not but one needs to mention that the China’s most-favoured nation (MFN) average tariff currently stands at 9.8% and the US is included here as well. The last cut in tariffs was on 1 July covering approximately 1500 products. Asian equity markets have not responded to this news but most of them have managed to gains during the trading day. The Hang Seng (CHNComp) is standing out the most gaining 0.25% as of 7:00 am BST but during the day the index has been seen even higher. From a technical point of the index is, however, approaching its crucial resistance in form of the 75DMA which may again halt bulls before long.

The Hang Seng is trying to retain at least part of today’s gains. The 75DMA could be seen as a major obstacle for bulls in the nearest time. Source: xStation5

In the other news:

• Japanese Prime Minister Shinzo Abe wins the ruling party leadership election gathering 553 votes in favour and 224 against

• Italian Finance Minister Tria sees a 2019 deficit cap between 1.5% and 1.8%

• The US dollar is being subtly offered this morning while the 10Y yield keeps moving above 3.06%