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How Will The Markets React?

Global investors in the New Zealand market have been predominately preoccupied with international risk aversion flows over the past few active sessions. However, a bright light on the economic calendar may pull traders back to good old fundamentals. Scheduled for release early Friday morning in Wellington (or 22:45 GMT Thursday evening for the rest of the world), fourth quarter Gross Domestic Product will be the biggest indicator from the country to hit the news wires in months. Heading into the release, the market’s official outlook was colored by Bloomberg’s survey of economists which provided a 0.9 percent consensus. For some historical context, if the quarterly number prints in line with expectations, it would be the fastest pace of expansion in a year and a half. On the other hand, the annual pace of growth in the three months through September decelerated to a seven-year low 1.4 percent; and a modest pick up would not immediately change investors’ assessment of the economy’s performance. Nonetheless, officials are confident New Zealand is rebounding from a ‘soft landing.’ In a speech earlier this month, Finance Minister Michael Cullen offered up his promising outlook for growth. Perhaps a better show of confidence, RBNZ Governor Alan Bollard took the risk of raising the overnight cash rate to a record 7.50 percent despite signs that inflation may fall within the central bank’s tolerance band in the months ahead. For a more objective (but still speculative) outlook for growth, related data from the same period provides a more mixed bag. Supporting the optimists, the jobless rate through the three months fell to 3.7 percent. In turn, this encouraged a surge in spending to the tune of a 1.8 percent increase in the final quarter – the biggest increase since the second half of 2004. Conversely, manufacturing activity hit a year-and-a-half low while the trade deficit deepened. In the end, even if growth accelerates, risk aversion may still dominate the kiwi investment landscape.

Bonds – New Zealand 10-Year Government Bond

New Zealand government bonds have come under fire in recent weeks. For years, the international community’s ability to borrow at lower rates in countries like Japan and invest in the high yield of New Zealand government bonds have supported a healthy demand for the latter asset. However, recent risk aversion has led many foreign investors to dump their New Zealand debt holdings to avoid the risk inherent in a country with a growth rate recently quoted at a seven-year low. Perhaps more concerning is the disturbingly high current account deficit/GDP ratio which has threatened the country’s outstanding sovereign debt rating in the past. If GDP hits the wires as expected, the 5.95 resistance in yields may fall. Conversely, even a small shortfall could push yields back towards 5.785.





FX – NZD/USD

The New Zealand dollar may have finally topped out at yesterday’s high of .7204 as the NZDUSD pair has since declined – only the second down day in the past twelve. Moreover, the recent break of a steep supporting trendline could mark the start of more precipitous declines should the markets continue to move towards risk aversion. Indeed, tensions in Iran have only mounted and sparked further flight-to-safety as the country is still holding 15 British soldiers captive and rumors have started to circulate that the US has planned to attack on April 6. However, the release of 4Q GDP for New Zealand could muddy the scenario, as the expected jump of 0.9 percent significantly raises the potential of additional monetary policy tightening by the Reserve Bank of New Zealand. A benchmark rate of 7.50 percent has already boosted the high-yielding currency significantly, and with the carry trade likely to only widen even further in favor of Kiwi, there is great potential for the pair to appreciate above the critical .7200 level. On the other hand, if 4Q growth disappoints the markets, NZDUSD could plunge from the recent top towards longer-term trendline support near .6720.





Equities – NZX 50 FF Gross Index

New Zealand equities have followed the path of global markets over the past few weeks, as the NZX 50 Index has gained fairly steadily over the past few days. However, shares followed the lead of Japanese equities yesterday, bringing the New Zealand benchmark index down 0.4 percent to 4,109.87 during the Wellington session. Trustpower, the fourth largest generator and retailer of electricity in New Zealand, slipped to $8.35 while Fletcher Building, the country’s largest producer of building products, gave up some of yesterday’s gains to ease NZ$.06 to NZ$11.10.

The NZX 50 Index could rebound above the recent highs of 4,130.00 on the release of 4Q GDP for the country. The figure is anticipated to jump 0.9 percent from 0.3 percent in 3Q as a result of accelerated consumer spending and construction in the country. A surge in expansion would be encouraging for businesses, as stronger growth would likely boost profits. On the flip side, equity traders could be discouraged by the potential for additional monetary policy tightening by the Reserve Bank of New Zealand, which will likely be looking to cool rocketing domestic demand and rising inflation.