GDP and PMI manufacturing data both exceeded expectations to rise in tandem, providing a further boost for the New Zealand Dollar. In turn, this becomes a conundrum for RBNZ who require a lower NZ Dollar to help their export markets.
Whilst RBNZ are unlikely to be pleased by the recent bout of strength for the New Zealand Dollar, recent data from the PMI and GDP reads point to strength within the economy's future prospects. However, a rising NZD undermines RBNZ's efforts to talk down their currency, as a lower currency is required to help their contracting tradable inflation via exports. A higher Dollar naturally makes their exports more expensive to any importer, which in turn will eventually weigh on growth.
Although lack of growth doesn't appear to be the case yet by looking at last week's GDP figure, which now stands at 2.7% Yoy%. Construction was the biggest contributor at 4.9% with all construction sub-indices on the rise. Healthcare and residual care increased by 2.7% whilst manufacturing declined 0.4%. Exports of goods and services declined by 1% - with the higher NZ Dollar we would expect exports to decline faster in Q2 which adds further pressure on RBNA to talk their currency down.
Business PMI, regarded as an excellent leading indicator for future GDP growth now sits at a 4-month high. The employment component jumped 3.3% higher to drag its way out of contraction status whilst new orders, often considered a leading indicator to the PMI itself, remains just shy of the 3-month high at 59.9.
The Trade Weighted Index has now risen to levels last seen in May 2015, which was pushed to a 2016 high after RBNZ held rates and prompted a short-covering rally. We had argued that whilst we expected rates to remain on hold the pressure is now on RBNZ to get their currency lower.
With another 4 weeks left until the quarterly inflation data is released, we are on guard for nay public comments from RBNZ members which could potentially send the NZ Dollar lower. However, the timing of any such comments will have to be compatible with any commentary from the FED; If the FED do turn hawkish again this makes a lower Kiwi Dollar more likely but if they remain dovish (like the futures markets are currently implying) then RBNZ have to think very carefully about how and if they fight the trend of a higher NZ Dollar.