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NZD/USD sits at two-week highs above 0.6700 in the lead up to the all-important US Federal Reserve (Fed) monetary policy decision following which the NZ Q2 GDP figures will be released on Wednesday at 22:45 GMT. New Zealand’s (NZ) solid response to contain the coronavirus pandemic is likely to translate into a less severe economic contraction than anticipated, although stricter lockdowns and borders controls imply a slower economic recovery in the long-term. 

Key quotes

“The South Pacific nation is set to witness the first recession in ten years, with the GDP likely to shrink 12.8% QoQ in the three months to June vs. -1.6% seen in the first quarter of 2020. On an annualized basis, the economy is expected to contract 13.3% in Q2 vs. -0.2% prior.”

“When compared to a weaker global outlook, NZ is expected to grow by an average 4.2% across 2021 and 2022 while the economic growth in Australia the US is foreseen at 3.6% and 3.5% respectively. Further, a faster-than-expected turnaround in the Chinese economy also boosts the case for a less severe economic downturn projected for New Zealand. China is NZ’s top trading partner and dairy is the Kiwi nation’s leading export product.”

“A dovish Fed followed by a positive surprise on the NZ GDP figures could likely to bode well for NZD/USD, allowing for a rally towards 0.6800. While the Fed’s concerning tone on the US economic recovery could dampen the market mood and limit the impact of a shallower NZ recession.”