THE TAKEAWAY: New Zealand GDP posts firm growth at 2.6 percent annually > Markets likely interpret growth as rate neutral > Kiwi trades higher
The New Zealand Dollar traded sharply higher versus its major counterparts as gross domestic product for the second quarter came across the wires slightly stronger than expected. The print posted gains in production of 0.9 percent for the three months ending June 2012 and increased annually by 2.6 percent.
While the quarterly reading narrowly slowed to 0.6 percent gains from 1.1 percent gains from Q1, output accelerated on a yearly measure by 2.6 percent from 2.3 percent. A firm growth figure should provide confirmation to central bankers that current interest rate policy is likely on target and future borrowing cost reductions may not be needed.
Traders probably interpreted the relatively strong growth reading to mean that rates will likely stay put thus boosting bids for Kiwi yield while Australia’s economy has been somewhat sensitive to the European and Chinese slowdown which could exert pressure on RBA officials to lower rates in the future. According to Credit Suisse data, market participants appear to be pricing in 11 percent chance of 25 basis point reduction to rates by the RBNZ while markets price in a 66 percent chance for 25 basis point reduction by the RBA. Moreover, markets seem to be anticipating almost a full percentage point rate reduction during the next 12 months by the RBA versus a dismal .09 percent reduction by the RBNZ over the same time frame.
The chart below appears to reflect markets’ forward looking rate expectations as the Australian Dollar was sharply sold versus the Kiwi. Both pairs are considered higher yielding investment currencies and are sensitive to rate expectations.
AUD/NZD, 1 Minute Chart