BOK: On The Lookout

New Zealand Institute of Economic Research (NZIER) says that its "Consensus Forecasts show a downward revision to the growth outlook over the coming years, despite the stronger starting point. The revisions reflect expectations of weaker activity across most sectors from 2023. Although the recovery in demand was stronger than initially expected as lockdown restrictions were relaxed, there are increasing headwinds for the New Zealand economy. These headwinds include continued global supply chain disruptions as countries continue to grapple with COVID-19, the war in Ukraine and rising interest rates."

• "Beyond the higher starting point, Consensus Forecasts for GDP have been revised down throughout the projection period. This reflects headwinds facing the economy as the COVID -19 pandemic continues to cause global supply chain disruptions and central banks raise interest rates in response to the surge in inflation."
• "The inflation outlook has again been revised higher , with annual CPI inflation expected to remain above the Reserve Bank’s inflation target mid -point of 2 percent through the coming years. The high inflation environment reflect s the effects of supply constraints on the price of imported goods and capacity pressures in the New Zealand economy."
• "The unemployment rate outlook is broadly unchanged, with expectations for slightly softer employment growth and a slightly higher unemployment rate later in the projection. However, wage growth has been revised markedly higher throughout the projection. The labour market remains very tight, and the generally high inflation environment is supporting stronger wage growth."
• "With major central banks around the world highlighting their increased concern with inflation and embarking on monetary policy tightening, the interest rate outlook has again been revised up."
• "The NZD TWI has been revised lower across the projection horizon. Although the Reserve Bank of New Zealand was early in tightening monetary policy, as other central banks have followed suit , this has reduced the yield attractiveness of NZD - denominated assets . This has put downward pressure on the New Zealand dollar."
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Upticks in COVID-19 numbers in Beijing and Shanghai as well as generally downbeat commentary around the virus situation in the two megacities have created a headwind for risk at the start to the new week. Coupled with the carry-over from market reaction to above-forecast U.S. CPI figures released Friday, this has rendered the Aussie dollar the worst G10 performer.

• Fallout from broader risk backdrop (VIX index up, equity markets in the red) and commodity markets (Bloomberg Commodity Index slipped) applied pressure to the Aussie dollar last Friday, with early Asia-Pac trade showing no clear signs of this risk-off impetus letting up.
• Domestic financial markets are shut in observance of a public holiday, with obvious implications for AUD liquidity.
• Spot AUD/USD trades at $0.7025, down 33 pips on the day and through the prior day's low, with bears setting their sights on May 18 low of $0.6950. Bulls need a clearance of Jun 9 high of $0.7202 before taking aim at Jun 3 high of $0.7283.
• Implied volatilities are up across the curve, with participants preparing for Wednesday's FOMC monetary policy decision & Thursday's Australian labour market data.
• Local data highlights this week include CBA Household Spending & NAB Business Confidence (Tuesday), Westpac Consumer Confidence (Wednesday) & jobs market report (Thursday).

Risk-off impulse has generated headwinds for the kiwi dollar, as the GDP week gets underway. Weekend updates on China's COVID-19 situation brought no reprieve, as Beijing conceded that an outbreak linked to a popular bar is proving difficult to control, while Shanghai suspended dine-in services and punished several local officials for missteps in implementing quarantine measures. Regional catch-up to expectation-beating inflation data released out of the U.S. Friday is adding pressure to riskier currencies.

• NZGBs went offered as cash trade re-opened, with 10-year yield topping 4.0% for the first time since 2014, as the space took its cue from Friday's post-CPI slump in U.S. Treasuries.
• Reminder that Australian financial markets are closed in observance of a public holiday, which may limit liquidity in the region.
• NZD/USD changes hands at $0.6347, down 25 pips on the day. From a technical point of view, the next layer of support is located at $0.6291, which represents the low print of May 18. Bulls need a rebound above Jun 3 high of $0.6576 to regain poise.
• NZD/USD implied volatilities have rallied across the curve ahead of this week's NZ GDP data & U.S. FOMC's monetary policy decision. The 1-week tenor sits at its best levels in three weeks.
• New Zealand's Q1 BoP current account balance will hit the wires Wednesday, before the release of Q1 GDP on Thursday. Friday's publication of May BusinessNZ M'fing PMI will top off the local data docket this week.