Greetings, forex friends! If you’re looking for a likely catalyst after the FOMC frenzy is over, then your best bet is New Zealand’s upcoming Q3 GDP report (Dec. 16, 9:45 pm GMT). And lucky you since I’ve got this here Forex Trading Guide to help ya get up to speed.
Oh, for the newbie forex traders out there, GDP is THE main and most comprehensive gauge of economic performance within a country’s borders, which is why it’s very important to forex traders and decision-makers alike.
And with that out of the way, here are 3 things to remember when trading New Zealand’s Q3 GDP.
1. The Previous Readings
- Q2 GDP q/q: 0.4% vs. 0.5% expected, 0.2% previous
- Q2 GDP y/y: 2.4% vs. 2.5% expected, 2.6% previous
New Zealand’s Q2 2015 GDP expanded by 0.4% quarter-on-quarter, which is faster than Q1’s 0.2% growth, but a bit lower than the 0.5% increase expected by forex traders and market analysts.
In terms of output per industry, the main drivers were agriculture, which was up by 3.0% “due to increased dairy production,” and mining, which was up by 2.5% “due to an increase in oil and gas extraction.” The main drag, meanwhile, was the 1.8% contraction in transport services due to “decreases in road transport and transport support services.”
In terms of expenditure, household spending was king (or queen if you like), contributing 135 NZD billion (56.25%) to the 240 NZD billion New Zealand economy. Net export was a non-factor, though, since exports and imports cancelled each other out (65 NZD billion each).
On an annualized basis, Q2 2015 GDP grew at a slower rate than expected mostly because of the 0.4% contraction in manufacturing (+0.1% previous) and slower growth in services (+0.5% vs. +1.4% previous).
2. The Expected Readings
- Q3 GDP q/q: 0.8% expected vs. 0.5% previous
- Q3 GDP y/y: 2.3% expected vs. 2.4% previous
For the upcoming Q3 2015 GDP report, forex traders and market analysts are expecting a 0.8% quarter-on-quarter expansion while the year-on-year reading is expected to tick lower by 0.1% to 2.3%.
Economic reports that already came out seem to support a quarter-on-quarter increase at the very least. Retail sales volume, for example, jumped by 1.6% in Q3 after only increasing by a measly 0.1% back in Q2, which would help to pump up the household spending component of GDP growth.
Business New Zealand’s Performance of Services Index (PSI) and Performance of Manufacturing Index (PMI) for the Q3 months were also pretty robust, with September’s PSI printing a 59.3, which is the highest ever since November 2007.
The only major threat to GDP growth is the horrible trade deficit that New Zealand has been experiencing in the Q3 months, but if you look deeper into the reports (and I have been mentioning this in my Monthly Economic Reviews), around 25% of imports are actually capital goods, namely commercial aircraft and factory equipment, which would probably be added to GDP growth as gross fixed capital formation (economic-speak for increase in investment).
And in Q3 2015, capital goods increased by a whopping 23.0% (+4.0% previous), which was mostly due to a 15.7% increase in aircraft imports, a 12.4% increase in imports of electrical machinery and equipment and a 7.2% increase in mechanical machinery and equipment.
Also, Q3 exports increased by 6.4% on a quarterly basis, but unfortunately contracted by 3.8% on an annualized basis, which is probably why forex traders and market analysts are expecting the annualized reading to grow at a slower rate. The RBNZ did note in their latest monetary policy statement that exports in services was growing due mainly to “increasing tourism activity,” so maybe that could offset the decrease in exports of good.
Overall, the expected readings seem about right, but there’s also a good chance that we’ll be seeing an upside surprise.
3. How The Kiwi Dollar Could React
Forex traders were expecting GDP to grow faster at least on a quarterly basis and the dairy auction just the day before yielded a solid 16.5% increase for the GDT price index, so forex traders were naturally happy to load up on the Kiwi before the GDP report came out. However, the GDP report came out as essentially mixed given that it increased but at a lower rate than the market consensus. As a result, forex traders reacted in a mixed way as well, and the GDP report turned out to be essentially a non-event in the end.
For the upcoming GDP report, just remember that forex traders tend to focus more on the quarterly growth, and a higher-than-expected reading usually triggers a short rally as a knee-jerk reaction while a lower-than-expected reading convinces forex traders to go on a Kiwi selling spree.
The previous GDP report was obviously an exception, however, since the 16.5% increase for the GDT price index was the third consecutive increase after 10 consecutive decreases, so forex traders were very bullish on the Kiwi at the time, which probably overturned the disappointment over the lower-than-expected reading.
Anyhow, make sure to keep an eye on the annualized reading as well since it helps to determine if there’s going to be some follow-through buying or selling after the knee-jerk reaction. Also, make sure to keep an eye on how the market will react to the U.S. Fed’s (probable) rate hike since that would probably pump up risk appetite, and hence, most likely pump up demand for the high-yielding Kiwi.