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NZD Predictive Econometrics Point To Decent Recovery

New Zealand Dollar

Goldman Sachs reported some forex signals by utilising its own predictive econometric model called the FCI or the New Zealand Financial Conditions Index. It has been in existence since 2005. It was based on a similar methodology used to construct an econometric model of Australian FCI. This includes the weighted average of the Reserve Bank of New Zealand’s policy rate, annual change in the NZD trade weighted index, corporate bond spreads, the yield curve and the annual change in NZX50, with weights based on simple econometric estimation of these variables in explaining annual real GDP growth.

Econometric Analysis

According to Goldman Sachs, the FCI has generally elicited forex signals turning points in New Zealand’s business cycle since 1997is relatively well. The index highlighted the sharp showing in economic activity between 2007 and 2009 (which occurred even before of the onset of the global financial crisis) and the subsequent loosening in financial conditions, which helped generate a decent recovery in activity growth over late 2009.

Using the predictive FCI model, it showed that the modest loosening in financial conditions year-to-date, with narrower corporate bond and mortgage rate spreads more than offsetting the higher New Zealand dollar and interest rates points to a further hike in annual GDP growth over the second half of 2013 and into early 2014. Directionally this is consistent with the broker’s current forex signals, which revealed annualized GDP growth climbing to 3.0% over second half of 2013, from just 1.1% over first half of 2013. However, it is also consistent with some upside risk to the broker’s forecasts now developing.

NAB Confidence Survey

Meanwhile, The National Australia Bank confidence survey revealed a mix of strong increase in business confidence. It climbed 8 points to a high of 3.5 while still subdued business conditions with forward looking components of the survey showing few signs of a significant recovery in economic growth.

The increase in business confidence is more broad-based that the previous month. Despite that the increase in confidence is more dominated by the mining industry. Increasing stock market prices, improving consumer sentiment, positive economic news coming from China and the last federal election contributed to overall confidence in September. On the downside, forex signals from Goldman Sachs analysts indicated that this is less certain that the positive sentiment will remain at these levels if business conditions do not improve materially in the short term.

For the 2012 to 2013, the ABS now estimated the trade deficit to be AUD7.1B larger than previously reported, citing the overvalued nature of the Australian dollar. With these circumstances, seasonally-adjusted export earnings rose 3.1% M/M in August. Import values were lifted by 0.9% M/M. The dataflow forex signals have been mixed rather than universally positive, yet this is an optimistic development from the prior six months of negative data surprises.


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