The Journey for Kiwi Dollar vis-à-vis New Zealand's GDP Projections

  • Mar 30, 2020 NZDT
  • Team Kalkine
The Journey for Kiwi Dollar vis-à-vis New Zealand's GDP Projections

Coronavirus has gone on a rampage through global currency and financial markets with severe repercussions for the global and NZ economy. With travel bans and widespread quarantines amid lockdowns, every country is struggling in implementing health and economic measures to stop the spread of the virus.

As per the release by WHO dated March 29, 2020, COVID-19 has affected 476 people to date with one death in the country.

NZ economy is set to contract more in the year with the extent of contraction depends on the length of the lockdowns, the extent to which businesses have been affected, and how quickly the market turnarounds. This environment sparks a selling interest in the markets for the currency.

Kiwi Dollar's journey

The NZ dollar has been among the worst-hit currencies in global trading in 2020. The kiwi dollar has seen a significant fall from 0.660 in January 2020 to a low of 0.547 on 19th March, depreciating by ~17%.

Plunging equity markets, travel bans, oil price crash, cancellation of major events and the rising spread of the virus hit investor's sentiment to rock-bottom. Substantial trade and risk connections have also kept the currency under pressure.

However, the Kiwi currency saw a big rebound partly on the back of stimulus packages taken by the government and the Central bank.

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Finance Minister of NZ, Grant Robertson, made an announcement about $12.1 billion fiscal package which is worth 4% of GDP on COVID-19. It was a much larger package than what was implemented during the global financial crisis. The package included support for the health sector, the income of the vulnerable, aviation and wage subsidies for businesses. The relief package comes on top of the $12 billion 'Upgrade programme' designed to maintain a vibrant economy in the medium-term.

NZ’s Central Bank, RBNZ, has reduced the official cash rate to 0.25% from 1% on 16th March 2020. The bank also announced the purchase of government bonds up to NZ$30 billion over the next 12 months on 23rd March 2020 as adverse effects of the virus continue to distort economic activity. 

The kiwi dollar spiralled higher to close at 0.6051 on 29th March from the closing price of 0.5673 on 19th March 2020. The recovery in global equity markets is another factor for the NZ dollar rebound.

After the Federal Reserve reduced interest rates to zero, increased USD swap lines to other central banks and injected cash into their systems, the world is flooded with US dollar supply after a mad rush for US dollars two weeks ago.

The pace with which the kiwi dollar rebounded could be positive news for NZ as fiscal policy and lower cash rates in domestic and global economy eased financial pressures and supported recovery.

 

NZ GDP Projected to Plunge in Q2

With New Zealand on level 4 lockdown at present, the economic road is uncertain and could go in a deep contraction if the outbreak is not contained.

OECD projects economic growth of New Zealand to edge down to 2.6% by 2020.

Big banks, such as ABS and ANZ, are expecting GDP of NZ to contract by approximately 6% this year, primarily driven by the coronavirus, well above the sub 3% cumulative reductions to NZ manufacture-based GDP in the 1990s as well as the global financial crisis of 2008.

ABS bank expects GDP of NZ to take a sizeable cumulative hit due to COVID-19 as not all the activity that suffered during the lockdowns will be back. The bank estimates a 15% decline in Q2 GDP and approximately 10% climb in the second half of 2020 contingent on the persistence of lockdown. It expects the unemployment rate to hover around 7% in 2020 but to drift lower from 2022 onwards.

ANZ expects NZ GDP to fall by 5-6% over 2020 with a substantial drop of 17% in Q2. It had forecasted a 3-4% dip in GDP on average earlier. The bank is of the view that unemployment rate is expected to be 8% for 2021 Q1.

Westpac has been estimating annual GDP for 2020 to be 5.6% lower than 2019 and unemployment to increase to 9%. It estimates a 1% decline in NZ GDP in the March quarter and 14% in the next quarter. After the lockdown, the economy is expected to gather pace as businesses reopen. Subsequently, the bank has forecasted a 9.9% jump in GDP in Q3.  

Business confidence has fallen significantly due to coronavirus disrupting global economic activity.

Head of Research of BNZ, Stephen Toplis, mentioned, "Economy is not expected to level to pre-crisis levels till the year 2023, and it is very difficult to bring unemployment rate below 5% before 2025.

Weak NZD in the near-term

 

Bank

NZD/USD forecast

 

Jun-20

Sep-20

Dec-20

Mar-21

Jun-21

Sep-21

ASB

0.55

0.58

0.60

0.61

-

-

Westpac

0.60

0.62

0.64

0.65

0.65

0.66

BNZ

0.56

0.60

0.62

0.64

0.65

0.66

Source: ASB, Westpac and BNZ reports

As per the table mentioned above, ANZ, Westpac and BNZ expect a depreciation of NZD in the near-term.

There is a sharp shift in sentiment away from USD due to increasing focus on rising lay-offs and precipitous spread of coronavirus in the US, while NZD is firming on “food exports.” New Zealand is well placed to meet its food demand than many countries to withstand the consequences of coronavirus outbreak.

However, the tourism industry is expected to be slow to bounce back, and due to extensive quantitative easing measures taken by the government, capital can flow out of the country, which can bring NZD down. The overall currency forecasts remain uncertain due to high market volatility amid coronavirus.

All prices amid currency pairs are relative values. If New Zealand comes out healthy and is successfully able to fight the coronavirus crisis better and earlier, then NZD is least expected to fall.

The banks expect a weaker NZD due to increased risk aversion attitude. NZD can edge higher compared to other key exchange rates if COVID-19 impact dwindles.

 


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