Daily Economic Commentary: New Zealand

[ForexGump]

The NZD was pretty quiet last Friday as it just traded side wards within a tight 70-pip range. No economic data from New Zealand was also released, keeping volatility low. Price movement would probably come back in full swing this week as the Reserve Bank of New Zealand is scheduled to release its interest rate decision on Wednesday, 9 pm GMT.

Interest rate decisions usually have a drastic effect on the foreign exchange market. The reason behind this is that investors tend to purchase securities that pay larger interest rates. All things being equal, it’s only logical for people to put their money wherein the yield is greatest. New Zealand’s benchmark interest rates currently stand at 2.50%, which is pretty high compared to how low interest rates are in the western part of the globe. This gives New Zealand’s central bank a lot of room to move with regards to interest rate cuts to ease the recession’s grip on the economy. With all these signs from economic data that the global recession is easing, economists are expecting interest rates to remain unchanged.

Prior to the RBNZ rate statement, the country’s trade balance is due later at 10:45 pm GMT. The 858 million dollar surplus from May is expected to drop to 214 million in June.

[ForexGump]

Up and down trading for the Kiwi yesterday, as it lost during early in the Asian session, rallied in the European session, before ultimately closing slightly lower as it gave up its gains during the US session. The NZDUSD pair closed 10 pips lower on the day, closing at .6564.

Late yesterday, New Zealand’s trade balance report showed a surprise, as the deficit widened to $3.18 billion NZD in the 12 months ending June 30. This was up from May’s figure of $ 2.97 billion NZD. The large increase in the deficit was fueled by a surge in imports due to purchases made in the aircraft industry. Without this one-time investment, imports would have fallen by 20% from a year ago, indicating that the recession is indeed causing companies to cut back on investments.

Looking ahead, the Building Consents m/m report comes out later today at 10:45 am GMT. The report is expected to show that consents went down by 4.8% in the month of June. This is somewhat discouraging, as consents had gone up by 3.5% in May. Let's see if the markets have priced this in already.

The big news coming up later this week is the Reserve Bank of New Zealand's interest rate decision on Wednesday at 9:00 pm GMT. It is expected that the RBNZ will keep its current rate at 2.50%. Given the recent improvements and sentiment that the recession is easing, it is probably very likely that there will indeed be no rate cut. Never the less, I’ve been burned before by surprise rate cuts and any mentions of possible quantititave easing. Better to be safe and be wary of this upcoming event.

[ForexGump]

The Kiwi saw some fast and furious movements yesterday. Despite a sharp deterioration in New Zealand's trade balance, the NZD rallied alongside the AUD. As the day drew to a close, the NZD returned its gains as risk aversion revisited the markets.

After its trade surplus of 907 million NZD shifted into a trade deficit of 417 million NZD, the Kiwi found itself on the heels of a strong rally by the AUD. The AUD drew strength from positive comments from RBA Governor Stevens. But as the US reported a disappointing consumer confidence reading, the NZD/USD slid back down.

New Zealand's building consents for June, which saw a 9.5% drop, pushed the NZD even lower. The actual figure was almost twice as much as the forecast of a 4.8% decline. This reflects a massive deterioration from the previous month which saw a 3% uptick in building consents.

The NZD has a chance to get back on its feet today as the RBNZ releases its official rate statement at 9:00 pm GMT. No interest rate cut is expected but positive comments from RBNZ officials could buoy the NZD back above the 0.6600 mark. Prior to this, business confidence figures are due at 3:00 am GMT. No forecast was given but a large improvement over the previous reading of 5.5 should prop the Kiwi up. But considering the latest slew of weak economic data, business sentiment may not be so upbeat.

[ForexGump]

Risk aversion in the capitals markets continued to be the NZD’s ghost. Same with the other higher yielding currencies, the NZD got beaten by the USD and JPY in yesterday’s trading.

The NBNZ business confidence index recorded its highest mark since 2002 at 18.7 from the previous reading of 5.5. According to the National Bank of New Zealand, the jump in the index suggests that the “light at the end of the recession tunnel may be just around the corner.” The NZD got some support following the report.

Earlier today, the Reserve Bank of New Zealand left its target interest rate unchanged at 2.5% for a second month. Reserve Bank Governor Alan Bollard hinted of a possible rate cut in the future if the economy does not continue to ease. The NZD fell across the board following the statement. According to some economist, the NZD is stronger than ‘normal’ and such is hampering New Zealand’s recovery, particularly the country's exports.

No other economic events are scheduled in New Zealand today. The NZD may be affected, however, with the release of the unemployment claims in the US. The figure is expected to rise to 578,000 from 554,000. Such increase could spark another round of risk aversion which would be bearish for the NZD.

[ForexGump]

The NZD dropped like a bomb yesterday despite the Reserve Bank of New Zealand (RBNZ) keeping interest steady for the third consecutive time. The prime culprit? Lackluster dovish comments from RBNZ Governor Alan Bollard.

Governor Bollard mentioned in his announcement yesterday that the bank decided to keep interest rates at low levels for the time being as inflation is well in line with their target. He even went so far to say that the bank most probably will slash interest rates further if economic conditions do not ease.

Have traders priced in economic recovery way too early? It seems like the RBNZ thinks this is the case, given its rhetoric yesterday. Apparently, the RBNZ is really concerned about the recent strength of the NZD versus other major currencies since New Zealand’s export sector composes a huge chunk of its economy. If the NZD continues to surge in value, the relative price of the country’s exports become too expensive for importers, which, in turn, dampens overall global demand. This could prove to be a serious bane to the country’s recovery. The thing is, even if this is the case, risk appetite remains the driver of currency values in the market today... And given these issues, it just makes me wonder how long the NZD could sustain its current price levels.

[ForexGump]

The NZD ended the week on a solid rise, erasing losses made the previous two days and closing near its yearly high. The pair rose by over 100 pips in intraday trading, closing the week at .6621, its highest closing price in 10 months.

Not much coming out from New Zealand this week except for some labor data. At 10:45 pm GMT, the Labor Cost Index q/q report is expected. This report measures the change in how much companies pay their employees. It is also a indicator of inflation as any additional costs in labor are normally passed on to consumers to pay.

At 10:45 pm GMT Wednesday, the unemployment rate will be announced. The rate is expected to jump to 5.6%. If the releases reveals worse than expected figures, we could see some weakness for the Kiwi.

[ForexGump]

The Kiwi sang to the tune of Miley Cyrus' The Climb as it staged a slow but steady "uphill battle" yesterday. Fueled by risk appetite, the NZD/USD moved past the 0.6600 mark and is currently testing the 0.6700 level.

According to New Zealand's Treasury, the nation's economy is expected to bounce back to positive growth by the end of this year. This statement, which hints that the third quarter of 2009 may mark the end of New Zealand's contractionary cycle, boosted confidence in the Kiwi.

Meanwhile, wage inflation was reported to have slowed down as rising unemployment reduced the pressure for companies to hike up wages to attract workers. Labor cost index rose by 0.3% quarter-on-quarter, missing expectations of a 0.5% increase.

ANZ commodity prices are on tap for today. This report is due at 3:00 am GMT. Commodity prices were up by 0.2% in the previous month and, given the recent commodity rallies, another uptick might be in the cards for June. No other economic reports are due from New Zealand today but the Kiwi could make another climb if risk appetite stays in the markets.

[ForexGump]

The sun shone over New Zealand as the Kiwi managed to inch further against the USD and JPY in yesterday’s action. The NZD/USD and NZD/JPY pairs were also able to close above the previous month’s high. Such extends the possibility of the Kiwi moving higher.

The ANZ commodity prices for the month of July rose by 1.0%. The index managed to advance by only 0.2% in June. The account measures the change in the global price of exported commodities. Commodities take up the majority of New Zealand’s exports. Hence, any increase in the index would translate to a gain in the total value of New Zealand’s exports (assuming that demand is inelastic for that period). The jump in the index, however, was not able to support the NZD. The NZD started falling during the second part of the Asia session up to the end of the Euro session probably because of some profit taking actions.

The NZD’s feat was jump started during the start of the US session as risk tolerant investors once again took the center stage. Confidence on higher yielding assets and currencies was further boosted with the surprise increase in the US pending home sales.

No economic reports are scheduled today in New Zealand. However, the NZD may get a lift given the expected improvements in the ADP non-farm employment change and ISM non-manufacturing PMI.

[ForexGump]

The NZD held a steady tone versus the USD yesterday as it traded within a very tight 50 pip range. Economic data that came out failed to create any significant impact on the NZD’s price action.

New Zealand’s June unemployment rate just released increased to 6% from last reporting period’s 5.6%. It seems that joblessness is still continuing to mount despite all the “green shoots” here and there. Economists are saying that the labor market would experience more losses in the coming months.

No economic data is set for release today so the NZD’s price action would be highly dependent on whether investors are in the mood for some risk taking or not.

[ForexGump]

Tight trading for the NZDUSD pair resumed yesterday, although the NZD did lose some gains from the previous day as the USD rallied slightly across the board. The pair closed trading at .6707.

Nothing coming out from New Zealand today, so be on the lookout for any news that could cause shifts in risk sentiment. I expect some fireworks during the US session, when employment data will be available. If the new boost risk appetite, we could see the NZD reach for new highs. Conversely, if it sparks a return of risk aversion, we could see the NZD have another day of losses.