New Zealand’s successful virus containment has created the necessary conditions for most kiwis to go about their daily lives with little disruption (notwithstanding short stints under lockdown). That, alongside the significant policy response, has made New Zealand one of the best-performing economies last year.
By weight, we estimate that around 75% of GDP industries more than recovered from lockdown by the end of 2020. And broadly speaking, strong growth in these industries has been enough to fill the hole left by the remaining 25%. But until borders reopen, growth is going to be harder to achieve from here, as the industries that have done most of the heavy lifting to date bump into capacity constraints.
In New Zealand, about 479,000 jobs are generated from the tourism and travel sectors and that is about 20% of the population. This sector is unlikely to recover this year unless the government feels that the pandemic vaccines have been deemed effective and the virus has been successfully contained. The government has resorted to wage subsidies to prevent the unemployment rate from ballooning. The company will cut the pay for the employee but the government reimburses companies the difference in pay because of the pandemic.
On the fiscal side, stimulus has been most potent from the wage subsidy, which protected jobs and incomes and provided a degree of certainty during disruption. A range of other temporary policy supports accompanied it. This wage subsidy scheme has drained the fiscal resources of the country and the country's debt to GDP ratio has risen significantly higher than a year ago. Now that the wage subsidy is going to be rolled off at the end of the year or once the country, fiscal policy is pivoting towards the likes of infrastructure spending, which will support the level of economic activity, but will not be an impetus to growth (that would require ever-increasing rates of spending).
In the next few months, we expect the New Zealand economy to grow steadily but not as fast as compared to USA. This is due to New Zealand's reliance on tourism to boost the economy further and potential draining of its fiscal policy through the wage subsidy schemes. Hence, I would expect the NZD to depreciate against the USD.
On 5th March, US Federal Reserve Jerome Powell left its policies largely unchanged which was surprising to many investors as they expected some changes to the current policy in the US. Treasury yields marched higher following the report but subsequently faded lower. Still, the Treasury curve has steepened significantly as economic conditions improve and new Treasury issuances to fund stimulus measures are expected. The USD has started to track higher with rising yields more recently and that trend may continue as the outlook for the US economy brightens. The USD moved higher after an impressive Non-Farm Payrolls report for February which was reported on Friday morning 5th March at 379k versus an expected 182k.
Federal Reserve Chair Jerome Powell this week appeared unconcerned with bond market volatility. However, Governor Lael Brainard stated that she had her eye on developments in the bond market and is “paying close attention.” The benchmark 10-year yield slipped slightly lower after the jobs report although it remains near multi-month highs. Unemployment data was better than expected as analysts expected the unemployment rate to be 6.3% but it was reported to be 6.2%.
Next week may provide further direction for the Greenback, with US inflation data on tap. Analysts expect inflation on a year-over-year basis to increase to 1.7% from the prior 1.4%, although core inflation – which excludes energy prices and other volatile items – is forecasted to remain at 1.4%. The rise in crude oil is one reason analysts are expecting the higher figure for inflation.
Additionally, I believe the USD will continue to strengthen due to the Dollar Smile Theory taking into effect. In the current cycle, we reckon the first two stages of the smile formation are complete: the dollar index shot to a 3-year high in March 2020, when investors sought it out amid the pandemic-linked market mayhem.
It then declined when the Fed slashed interest rates to 0%, hitting a near three-year low in early February on expectations of ultra-easy U.S. policy and additional borrowing that would blow out the balance of payments deficit. In the past month, however, the greenback has jumped by more than 2%, as a fast vaccination campaign appears to signal that the world's biggest economy will recover more quickly from the COVID-19 effects than most other developed nations.
In conclusion, New Zealand had always been ahead of the US when it came to the pandemic recovery but US is now catching up fast in terms of economic recovery with economic data beating consensus consistently. Hence, I would expect the USD to appreciate against the NZD in the next couple of months.
From Chart 1, there is a clear MACD divergence on the weekly timeframe. The MACD makes a lower high but the charts show a higher high. This implies a reversal trend is approaching.
From Chart 2, you can also observe a shooting star candlestick pattern as well as a bearish confirmation candle. The NZDUSD has rejected the resistance at the 0.73800 level and is likely to head downwards. We have set out first take profit level at the 0.67800 level which is the support for the trend. If the candle breaks below the support, it will test the 0.67800 as a resistance and then it is likely to head downwards to the 0.65000 level. Hence, we have set our first profit level at 0.67800 and the second take profit level at the 0.65000. The duration for this trade is approximately 2 to 3 months.
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