Another week, another opportunity at trading the news! Tomorrow at 10:45 pm GMT New Zealand will publish its GDP numbers for Q2 2017. Let’s explore the four questions you need to answer before you trade the event:
What the heck is a GDP report?
The gross domestic product (GDP) is the most widely-used measure of economic growth rate. Forex traders pay attention to GDP releases because central banks also look at GDP components and their trends for clues on how to proceed with their monetary policies. Statistics New Zealand usually releases the quarterly GDP two months after the quarter ends.
Based on the RBNZ’s latest statements though, it seems like the central bank is more worried about inflation and Kiwi strength than overall economic growth.
How did the previous release turn out?
Economic activity accelerated by 0.5% in Q1 2017, which is faster than Q4 2016’s 0.4% growth. However, it’s also slower than the 0.7% uptick that market players were expecting and RBNZ’s estimates of 0.9%.
On an annualized basis, the economy grew by 2.5%, which is slower than Q4’s 2.7% uptick and RBNZ’s forecasts of 2.9% growth. Not only that, but it also marks the third consecutive slowdown of annualized quarterly growth.Agriculture is still the biggest driver, with higher milk production boosting it by 4.3% (its fastest since September 2014!). Manufacturing is also up by 1.0% while higher sales of motor vehicles and parts pushed retail trade and accommodation 1.8% higher.
Construction was the blight in the report, though, as it dipped 2.1% after expanding by 1.4% in Q4 2016. ALL of the building sectors declined, with non-residential building construction being the key driver.
On an expenditure basis, it was household consumption (+1.3%) and fixed asset investment (+1.2%) that boosted the economy while lower exports and higher imports made trade activities a lagger.
How did NZD react to the previous release?
Kiwi bears partied in the pip streets as soon as they saw Q1’s GDP numbers miss their 0.7% expectations. In fact, the selloff didn’t let up until the start of London session trading when other catalyst came into play.
What do market players expect this time?
Analysts are expecting growth to clock in at 0.8% in Q2 2017 after rising by 0.5% in Q1. RBNZ, meanwhile, pencilled in a 0.9% growth in its estimates printed last month.
If you recall, Graeme Wheeler and his gang maintained their upbeat outlook for Q2 mostly because they also expect higher dairy production volumes to boost exports.
They added that “The high level of consents, combined with a backlog of work from early 2016, is expected to support growth in residential building in coming quarters.” Meanwhile, “strong population growth, improving confidence, and high terms of trade” are expected to continue supporting consumption.
Looking at the chart above, we can see that RBNZ (and market players) have legit reasons to be optimistic.
Manufacturing, retail, and employment are generally stronger than they were in Q1, while business sentiment, trade numbers, and even tourist activity are showing better numbers compared to the previous quarter. And as noted in my last economic snapshot, other signs point to stronger growth in Q2.
That said, take note that while the odds of Q2’s growth coming in weaker than expected is almost the same as its odds for a stronger reading, there’s a slightly bigger chance that growth in Q2 will come in weaker than the previous quarter. In that case, prepare yourselves for another round of intraday selling for NZD.
Speaking of “intraday,” we’ve seen time and again how Kiwi’s reaction to the GDP report tends to peter out at the start of London session. Consider taking profits before the start of a new trading session.
And then there’s the upcoming elections. Word around the hood is that the opposing Labour Party is catching up to the incumbent National party in the polls. Traders could choose to take profits and sit the weekend out if the plot thickens between the two leading parties in the next couple of days.
That’s it for our trading guide today. Hopefully these information will help you make pips during the GDP release. Good luck!