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Sep 17, 2020, 12:34 PM GMT

New Zealand Experiences Largest GDP Contraction on Record in Q2

Wellington Cable Car, the landmark of New Zealand.

The fears of the Reserve Bank of New Zealand were realised earlier today, when Statistics New Zealand published the recorded Gross Domestic Product data for the three months ending in June 2020.

According to the findings of the economic report, New Zealand's economy has contracted by 12.2 per cent in the second quarter, marginally beating the initial market expectations for an economic slump of 12.5 per cent.

This represents the largest quarterly decline on record, following Q1's downwardly revised contraction of 1.4 per cent.

New Zealand Quarterly GDP Growth Rate

The massive dropdown is the result of prolonged travel restrictions and containment measures in the country, which were eased only recently. Thereby, market experts expect to see a seesaw effect in Q3, reflecting on renewed economic activity.

The New Zealand economy resembles the situation in Australia closely in that the two countries rely heavily on the unimpeded functioning of the global supply chains. Given that Australia experienced a similar economic slump in Q2, allows policymakers in New Zealand to look to Australia as a benchmark for recovery.

The latter registered a welcoming stabilisation of labour market conditions in August, which should raise hopes in Wellington. Employment conditions in New Zealand are likely to improve as well, which would induce faster recovery.

Hence, market experts expect to see a gradual lift off from this massive dropdown by the end of the year, as economic activity recuperates following the easing of containment measures.

As can be seen on the 4H chart below, the kiwi rebounded against the dollar following the release of the news. The prospects of a sizable economic contraction in Q2 were mostly priced in by the market before the report itself was compiled.

The NZDUSD continues to be establishing a new bearish downtrend, which is affirmed by the downwards sloping trend line. Yet, today's pullback from the 50-day MA (in blue) gave bulls some hope in the short-term that the market is not yet ready to plummet.

If, however, the price action does manage to break down below this moving average, the next target level for the newly emerging downswing will be the major support level at 0.66400.

As manifested by the MACD indicator, the underlying market momentum is currently forming a new divergence, which favours the continuation of the dropdown's development further downs south.

NZDUSD 4H Price Chart