The New Zealand Dollar is trading higher early Thursday, following through to the upside after a rebound the previous session. The catalyst behind today’s early strength is a report that showed stronger than expected economic growth.
At 01:26 GMT, the NZD/USD is trading .7125, up 0.0015 or +0.21%.
New Zealand Economy Surged 2.8% in Q2
New Zealand’s economy grew at a much faster pace than expected in the second quarter, officials said on Thursday, reinforcing the view that the central bank will start lifting interest rates despite a recent outbreak of the coronavirus.
Gross domestic product (GDP) surged 2.8% in the three months through June, Statistics New Zealand said, well ahead of a Reuters poll forecast of a 1.3% increase in growth and the Reserve Bank of New Zealand’s (RBNZ) estimate of 0.7%.
Annual GDP jumped 17.4% due to a very weak base as the country was in a complete COVID-19 lockdown in the second quarter last year. A Reuters poll had expected a 16.3% rise.
Investors Price in RBNZ Rate Hike
The RBNZ delayed raising rates in August after the country was put into a snap COVID-19 lockdown over a new outbreak of the Delta variant of COVID-19 in Auckland, but said a hike was still in the cards. Nonetheless, the market has already priced in a 100% chance of a 25-basis point rate hike at the next central bank meeting on October 6.
Lack of Clarity Over Fed Tapering Underpinning Kiwi
The U.S. inflation rate as measured by the Consumer Price Index (CPI) came in as expected at +5.3% for August, unchanged from July. But the core inflation rate – without food or energy – came in lower than expected at 4.0% and that was not expected.
Both the U.S. CPI and economic expansion may be cooling enough to encourage the Federal Reserve to delay its plans for tapering at its next policy meeting on September 21-22. Although economists expect the Fed to begin tapering by the end of the year, we could see a near-term decline in Treasury yields and the U.S. Dollar. This could help provide further support for the New Zealand Dollar.
The New Zealand GDP report was good enough to support the widely expected rate hike by the RBNZ on October 6. That rate increase could be the first of many.
“We expect the RBNZ to ‘look through’ near-term volatility and reduce monetary stimulus, with a series of 25 basis point (rate) hikes starting from next month,” said Mark Smith, Senior Economist at ASB Bank,
With the RBNZ set to make a rate hike and the Federal Reserve still debating whether to begin tapering, the near-term advantage is likely to favor the New Zealand Dollar over the U.S. Dollar.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire