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New Zealand’s GDP rose by 0.6% in Q1 – more than expected. This prompts more rate hikes and a long term rise for NZD/USD.

Gross Domestic Product in New Zealand was expected to rise by 0.5%, and it surprised with a rise of 0.6%. It’s important to note that also the GDP for Q4 was revised to the upside – 0.9% instead of 0.8%, making the current rise even stronger.

In the past two quarters, New Zealand’s growth rate matches Australia’s – exactly the same growth rates. Among the differences between the countries, there’s a key difference in the interest rate: 4.5% in Australia and 2.75% in New Zealand.

New Zealand’s tightening cycle began with the initial raise from 2.5% to 2.75%, and it’s expected to continue. Alan Bollard, the governor of the RBNZ, hinted that this tightening cycle won’t be as strong as the previous ones, meaning that the interest rate won’t pass 8%, but there’s still a long way to go.

With the economy growing at this rate, also the interest rate will rise at a nice rate, without too many pauses.

As for NZD/USD, its moves will continue to be influenced by the general market moves as well as the local economy. Bad news from Europe sends traders to the “safe haven” currencies – the dollar, the yen and to some extent, also the Swiss Franc. The kiwi dollar, despite the sound economy, belongs to the other camp, of “risky currencies”.

But side by side with the rise in the interest rate and the improvement in the economy, the kiwi will enjoy carry trading – it will be bought by long term investors seeking to enjoying the higher yield.

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