AUD/USD and NZD/USD Fundamental Daily Forecast – RBNZ Rate Hike Talk Cools as Recession Talk Resurfaces

While many traders remained focused on the movement in U.S. Treasury bond yields, the Federal Reserve monetary policy decisions and the Australian labor market data, New Zealand released a report that showed a contracting economy, but more importantly, it cooled talk that the Reserve Bank of New Zealand was considering an earlier than expected rate hike.

New Zealand Economy Contracts as GDP Falls

New Zealand’s economy contracted in the final quarter of last year, raising concern of a second recession and quashing market talk that the country’s central bank may look to hike interest rates sooner.

Gross Domestic Product (GDP) fell 1.0% in the three months through to December, Statistics New Zealand said on Thursday, short of a Reuters poll forecast of 0.1% growth and below the Reserve Bank of New Zealand (RBNZ) flat estimate.

Annual GDP fell 0.9%, Statistics New Zealand said, compared with analyst expectations of a 0.5% rise.

New Zealand bounced out of recession with a revised 13.9% quarter-on-quarter GDP growth in the three months to September-end. That more than reversed the 11% drop in the preceding quarter when the country observed strict lockdown measures.

GDP Drop Could Be Indication of imminent Second Recession

The lower GDP figure represents a rare blip in a run of positive readings from New Zealand, which sparked a rally in its currency and bonds as markets anticipated a quicker pandemic recovery and a tightening of monetary conditions.

“The modest solid decline in activity in Q4 reflects the fading of pent up demand and means that in New Zealand a second recession is imminent as GDP is bound to decline in Q1,” said economist Ben Udy at Capital Economics.

Rate Cut Off the Table

ASB Bank Senior Economist Jane Turner said the Q4 GDP result will ‘quash any talk of rate hikes, and brings the risk of rate cuts back to the table.”

“In saying that, we expect the OCR (official cash rate) to remain on hold for the rest of the year,” she said.

RBNZ has said it will be patient and was in no rush to tighten monetary policy.

NZ Minister of Finance Downplays GDP Performance

Minister of Finance Grant Robertson said the country, has still outperformed the others it compares itself with.

“It is not surprising that these numbers are jumping around. The world is dealing with the ongoing impact of COVID-19 and there will be volatility for some time,” Robertson said.

For a look at all of today’s economic events, check out our economic calendar.