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The New Zealand dollar reversed directions after a solid 3-day rally. In the European session, NZD/USD was trading at 0.6432, down 0.55% on the day.
New Zealand’s number one trading partner is China, and it’s no exaggeration to say that when China sneezes, New Zealand catches a cold. China has tenaciously implemented a zero-tolerance policy for COVID, which has meant lockdowns that have confined millions of residents.
Unsurprisingly, this has dampened growth in the world’s number two economy. The COVID restrictions were in full force in April, and UBS has projected that China’s economy plunged by 8.0% in Q2 and has downgraded China’s 2022 GDP to 3.0%, down sharply from 4.2%.
Investors should not assume that China’s economy will re-energize once the COVID restrictions are eased—UBS is warning that China does not have a clear exit strategy from its current stringent COVID policy, which will hamper a recovery.
The downgrade in China’s GDP (JP Morgan also lowered its forecast from 4.3% to 3.7%) has soured sentiment towards the New Zealand dollar.
Over in New Zealand, retail sales for Q1 came to a screeching halt. The headline figure declined by 0.5%, down from 8.3% in Q4 2020, while core retail sales came in at zero, down from 6.8%. The weak numbers have contributed to today’s New Zealand dollar’s descent.
The Reserve Bank of New Zealand will be in the spotlight on Wednesday when it holds a policy meeting. The central bank is expected to raise rates by 50-bps for a second straight month.
This would bring the cash rate to 2.0%, which is considered a “neutral” stance. It’s noteworthy that the cash rate hasn’t been at the neutral level since 2015, so the RBNZ is moving into rarified air.
The RBNZ will likely continue its rate-tightening cycle to 3.0% in order to curb spiraling inflation, and at tomorrow’s meeting, the Bank will likely state that more hikes are on the way.
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