June GDP surprisingly strong and shows how robust NZ economy is; strongest half-yearly expansion in five years

By Mike Jones


We were pleasantly surprised by yesterday’s June quarter GDP figures. The 0.6% GDP expansion was certainly well north of our expectations.

It confirmed that the NZ economy actually held up quite well through the the first half of the year. Indeed, the 1.6% half-yearly expansion was the strongest we’ve seen in five years.

Sure, some of the indicators for H2 have soured a little. But growth is expected to continue at modest rates (our year-end forecast is 2.8%y/y). This simply reinforces the notion the RBNZ does not need to cut rates anytime soon, unless the rest of the world really goes pear-shaped.

Local markets thought the same. In the immediate wake of the GDP report, the odds of a rate cut over the coming 12 months were trimmed to roughly 40%, launching the currency higher.

In fact, the NZD has been the strongest performing currency over the past 24 hours. After spiking to almost 0.8300 yesterday, the NZD/USD managed to hold on to most of these gains overnight, despite a resurfacing of global growth concerns (see Majors).

Notably, our risk appetite index (scale 0-100%) has cooled from 77.5% to 76.1% this week, as investors have reassessed the likely success of QE3 and the tone of global data has remained lacklustre. While this has eroded support for ‘risk-sensitive’ currencies like the NZD/USD, the kiwi continues to draw support from the fact the NZ economy remains in better shape than most.

This has been a key tenet of our constructive NZD view for some time, and was only reinforced for yesterday’s GDP figures. We believe positive relative growth and interest rate differentials will support the NZD through to mid 2013. Our end-2012 NZD/USD forecast is still 0.8200.

We also forecast NZD/AUD at 0.8200 by year-end. The cross has shown more convincing signs of trending higher of late, as NZ-AU interest rate differentials have become less negative.

Indeed, plugging current interest rate spreads into our short-term NZD/AUD valuation model yields a ‘fair-value’ range of 0.7950-0.8150. This tends to support our view the uptrend has got legs.

For today, NZ net migration and credit card spending figures shouldn’t trouble the NZD/USD in any way. We should see key resistance at 0.8300 tested at some stage today. Another failure to close above this level would be a sign the NZD/USD uptrend is running out of steam.


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Global growth concerns returned to the fore overnight, tempering risk appetite and providing a boost to ‘safe-haven’ currencies like the USD and JPY. A near one cent slide in the EUR/USD led a pull-back across most of the major pairs.

Yesterday’s HSBC Flash Chinese PMI, at 47.8, revealed the 11th straight month of contraction in the Chinese manufacturing sector.

Given recent stimulus efforts from the government, investors had been hoping for something a little stronger.  Certainly, the risk is growing that Chinese growth undershoots the government’s 7.5%y/y 2012 target.

Investors’ disappointment saw the Shanghai Composite equity index shunted another 2.1% lower yesterday (to the lowest since Feb 2009), kick-starting a broad-based selloff in Asian stocks.

In tandem with equity market weakness, the ‘safe-haven’ USD began to find support at the expense of the EUR and AUD.

The news out of Europe wasn’t a whole lot better. The September European PMIs presented a mixed picture (France terrible, Germany encouraging), but the European composite index was indubitably weak (45.9 vs. 46.6 expected).

European and US equity markets gave up more of their post-QE3 gains as investors worried about the strength of global growth.

The VIX index (a proxy for risk aversion), meanwhile, climbed from 13.5% to almost 14.5%. Commodity prices too lost ground. Against a backdrop of broad USD strength and stuttering risk appetite, the EUR/USD slipped below 1.3000, and the AUD/USD fell below 1.0400 for the first time in a week and a half.

Looking ahead, there is little on the data calendar tonight. We doubt the weekend’s G20 meeting will produce anything particularly meaningful. So markets look set to end the week a little more downbeat than how they began.

With the risks to global growth again tipping to the downside, risk appetite may struggle to retain its post-QE3 buoyancy in the short-term. This should limit the AUD/USD and EUR/USD topside to 1.0600 and 1.3150 respectively.

Keep an eye on Spain though. If the rumours the sovereign is on the cusp of applying to the EFSF for a bailout prove close to the truth, we should see another pop higher in EUR.

Other News:

*US data remains encouraging. A solid reading on the Philadelphia Fed manufacturing index (-1.9 vs. -4.5 expected) partly allays global growth fears late in the session.

*US jobless claims hold at 382k, a little above expectations of 375k.

*UK retail sales fall 0.3%m/m in August (ex-auto), as expected.

Event Calendar:

21 September: NZ net migration; NZ credit card billings.

All its research is available here.

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