NZ dollar reaches 3-week high as stronger-than-expected 2Q GDP dents rate cut chances

Thursday 20th September 2018

The New Zealand dollar hit a three-week high against the greenback after the economy recorded its highest growth in two years, denting the chances of a rate cut.

The kiwi traded at 66.44 US cents at 5pm in Wellington from 66.15 US cents at 8am and 65.94 cents yesterday. It touched a three week high of 66.52 cents immediately after the second-quarter data. The trade-weighted index was at 71.98 from 71.51 yesterday.

Gross domestic product expanded 1 percent in the June quarter, accelerating from a 0.5 percent rise in March, and was up 2.8 percent on the year, Statistics New Zealand said. Economists had expected quarterly growth of 0.8 percent and 2.5 percent annual growth. The central bank was forecasting growth of 0.5 percent.

The GDP data attracted particular attention as the central bank had indicated it could cut rates if the economy failed to fire. Prior to the data, money markets had been pricing a 40 percent chance of a rate cut by May 2019. That fell to 20 percent after today's release.

New Zealand's two-year swap rate rose 4 basis points to 2.02 percent while 10-year swaps rose 5 basis points to 2.93 percent.

"Second quarter GDP growth was the strongest in two years and provided no evidence to support the notion that the economy has hit a pothole," said BNZ senior markets strategist Jason Wong. "An economy tracking much stronger than the RBNZ thought reduces the chance of rate cuts over the near-term, a probability we had already thought to be quite low."

Wong said the New Zealand dollar continues to trade at a discount to BNZ's short-term fair value model estimate, which recently slipped below the 70 US cents mark. He said, however, the immediate threat of a further "lurch" down to 0.63-0.64 US cents passed after the US and China imposed smaller tariffs than initially feared.

Sheldon Slabbert, a trader at CMC Markets, said the kiwi's reaction to the strong GDP number was "relatively muted." He would have expected more but "we are waiting to see how the UK/Europe receives the data and expect them to be buying kiwi overnight."

The kiwi rose to 91.53 Australian cents from 91.04 cents and to 74.53 yen from 74.08 yen yesterday. It traded at 4.5523 Chinese yuan from 4.5170 yuan and rose to 50.52 British pence from 50.14 pence and increased to 56.88 euro cents from 56.47 cents yesterday.

(BusinessDesk)

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