NZD traders, like their close cousins in Australia, might have to deal with something of a paradox over the next month when it comes to analyzing fundamental data.
While the economic situation improves, the data reports might be showing worse conditions. And the currency just might strengthen, even with unexpectedly bad data.
There is an important caveat, though. This depends on information coming out of China, and it’s not unheard of that the authorities in the Asian Giant make sure their reports reflect political goals more than reality.
However, China’s response to the coronavirus outbreak has come under unparalleled international scrutiny, with a wealth of information sources available.
New Zealand & the COVID-19 Outbreak
One would expect the Kiwis to be more affected by the virus outbreak than by the trade war. This is unlike with Australia, where the effect is the reverse.
New Zealand was one of the first to implement travel restrictions. And China is where most of their tourism comes from. Kiwi exports to China are mostly consumables. This means that, with shops being closed to fight the COVID-19 outbreak, there would be a drop in demand for goods from New Zealand.
During this period, one of the key indicators for the NZD, the global dairy price index, took a bit of a beating (as did most other commodities). Towards the end of last month, China started to report that the number of new cases had dropped significantly.
This indicated that the spread of the disease was coming under control. After the trend held for a couple of weeks, some quarantines were lifted and factories started going back to work, Thus, NZDUSD started moving up in anticipation of a return to normal.
Investors wanted to get in on the bottom of a potential V-shaped impact from the virus.
Why the Bad Data?
There is an offset between when the data is collected and when it gets reported. During March, we get reports from data collected during February when the COVID-19 situation looked most dire.
That offset means that even as conditions improve, we’re going to be getting relatively negative economic reports. This is why, despite the worst Caixing PMIs ever, the NZD got stronger over the last week.
Data Going Forward
Tonight, we have the report of New Zealand Manufacturing Sales for Q4. Expectations are for this to increase by 4.3% in price, compared to -0.3% in the prior quarter.
This was in the lead-up to the Phase I deal, and long before the coronavirus hit the news. Investors might be looking at this figure as where manufacturing might return to once the situation in China has normalized.
Tomorrow at night, we have Electronic Card Retail Sales for February. Expectations are that they will improve by 0.3% over the prior month. Annually, that implies an increase of 4.1% compared to 4.2%. This is below the usual increments we typically expect in the summer. However, given the economic situation, the markets might interpret the results as quite positive.
The next question on everyone’s mind is whether the RBNZ is going to follow the RBA in another rate cut. But, the meeting isn’t until the end of the month.
That might actually mean a cut is less likely if the expected recovery in China materializes over the next couple of weeks.