NZD/USD a proxy for global recession risks rather than New Zealand’s

• New Zealand GDP declined 0.2% in Q2 and 0.5% over the year
• Both outcomes were stronger than forecasts from the RBNZ
• NZD/USD remains a proxy for global economic sentiment
• NZD/USD is biased higher as long as risk appetite holds up

New Zealand one step closer to recession (again)

New Zealand’s economy contracted again in the June quarter, declining 0.2% on a production basis. The result saw the activity decline 0.5% from a year earlier.

Despite the dire numbers, the result was better than the 0.4% decline markets had expected, in part due to a downward revision to the March quarter growth pace from 0.2% to 0.1%.

Importantly, both the quarterly and annual figures were also stronger than the 0.5% and 0.7% figures forecast by the Reserve Bank of New Zealand.

Source: StatsNZ

Driven by strong population growth, GDP per capita declined 0.5% for the quarter and 2.7% over the year, reflecting the ongoing struggle to lift productivity. It’s not the only developed nation in that boat.

Real gross national disposable income – one measure of economic wellbeing – was unchanged over quarter and declined in per capita terms.

NZD/USD a proxy for global economic outlook

Despite the better-than-expected outcome, domestic considerations continue to play a distant secondary role for NZD/USD with global factors far more influential on the Kiwi’s overall performance.

The chart below underlines that point, looking at the rolling 20-day correlation with a variety of different variables from the FX, commodity, equity and rates universe.

In order from top to bottom, we have AUD/USD in red, whole milk powder futures in purple, US two-year yields in green, US 10-year yields in blue, Russell 2000 futures in black and crude oil futures in yellow.

Having demonstrated an incredibly strong relationship with dairy futures over much of August, coinciding with the Fed moving to signal the imminent start of its next easing cycle, that influence has since been replaced by sentiment towards the global economic outlook. That’s in the driving seat right now.

NZD/USD biased higher as momentum starts to swing

Looking at NZD/USD on the daily chart, it looks like it may be setting up for another run towards the highs struck in August with the price continuing to print higher lows within a broader uptrend. RSI (14) has broken its former downtrend, signaling a potential shift in momentum. While not yet confirmed by MACD, the latter appears to be turning higher, adding to the improving technical picture.

On the topside, an attempted bullish breakout was comprehensively rejected in the wake of the Federal Reserve rate decision earlier today, mirroring the price action seen on other ventures above .6260 recently. However, that may not perturb bulls as long as risk appetite remains strong.

Above, a tougher test awaits with downtrend and horizontal resistance intersecting around .6300. If that were to be broken cleanly, .6370 and .6411 are the next levels of note.

On the downside, .6157 has acted as both support and resistance recently, putting it on the radar should we see a dip. Beyond, the minor uptrend running from August 15 and support zone including the 50 and 200-day moving averages down to .6086 are other levels to note.

In the near-term, NZD/USD could be influenced by Australia’s jobs report released in a few hours given the strong correlation with AUD/USD. My inclination would be to fade the reaction, if we see one.

-- Written by David Scutt

Follow David on Twitter @scutty