NZD/USD slides as New Zealand economy sees largest contraction in 29 years

The NZD/USD pair declined slightly after New Zealand released weak first quarter GDP data. The pair is down by about 0.40% and is trading at 0.6435.

New Zealand reports worst GDP in decades

New Zealand has been credited for its handling of the coronavirus pandemic. The country, of more than 5 million people, reported about 1,500 infections and less than ten deaths. It also became the first country to declare itself free of the illness.

The government achieved this by declaring a national lockdown in the first week of March. Unlike in most countries, this lockdown was strict and enforced by security forces. At the same time, it conducted large scale tests and placed people into quarantine.

All these measures helped slow the spread of the disease. It also helped push the country into its worst recession in 29 years. According to Statistics New Zealand, the country’s growth plummeted by 1.6% in the first quarter. The other sharp decline was the 2.4% decline in the first quarter of 1991.

According to the statistics office, the lockdown announced in March led to significant impacts on the economy. Many non-essential businesses were closed while travel restrictions affected industries like hotels and tourism.

As with most countries, the service industry was the worst-affected. Indeed, its weakness was responsible for about half of the overall decline in GDP. The hospitality industry contracted by 7.8% in the quarter.

The construction industry declined by 4.1% while the transport and warehousing fell by 5.2%. Household consumption declined by 0.3%. In the report, the office said:

“Industries related to international travel, such as accommodation and transport, began to feel the effects of COVID-19 earlier in the quarter, with activity dropping significantly once the borders closed on 19 March.”

The 1.6% decline in New Zealand GDP compared with the 2.1% decline in Canada, 0.3% decline in Australia, and 2.0% decline in Japan.

Path to recovery

The New Zealand economy is on a path to recovery, as evidenced by the performance of the kiwi. The NZD/USD pair has gained by more than 8% in the past month, becoming the best-performing currency in the developed world.

That is because the country has started to reopen its economy. Most companies are now operating while sports are expected to start this weekend. Also, its big trading partners like China and Australia have also reopened.

Meanwhile, the government has provided significant support to the economy. For example, the government launched a near $10 billion stimulus package to support the economy. Under the scheme, full-time workers are receiving about $585 per week while part time workers are receiving $350 per week. The central bank has also brought interest rates at record lows, launched QE, and encouraged banks to keep lending.

NZD/USD technical outlook

The NZD/USD is trading at 0.6435. On the daily chart, the price is slightly above the 61.8% Fibonacci retracement level and significantly higher than the 50-day and 100-day exponential moving averages. It is also between the important 0.6400 and 0.6600 support and resistance levels. Therefore, I expect the pair to continue moving lower, with an eye towards 0.6400. A move below this support will see it continue moving towards the 100-day EMAs at around 0.6300.