[B]Trading the News: New Zealand Current Account Balance[/B]
[B][U]What is Expected
[/U][/B]Time of release: [B]09/19/2007 22:45 GMT, 18:45 EST[/B]
Primary Pair Impact : [B]NZDUSD
[B]How To Trade This Event Risk[/B]
Though the carry trade, risk trends and interest rates have dominated New Zealand dollar trade for the past few months, these market moving factors seemed to have loosened their grip on the currency recently. In fact, the primary draw of the kiwi dollar - its high interest rate - has even come under pressure recently as a global credit rout threatens to chock foreign demand and disrupt the New Zealand consumer who has relied heavily on borrowing for basic spending and mortgages. As these factors are worked through, fundamental traders will continue to absorb the market moving indicators that cross the wires. One of the top numbers to come of the wires is the quarterly current account balance. Only a year ago, the long standing deficit account for a record 9.7 percent of GDP and the major rating agencies were threatening to lower New Zealands sovereign debt rating and in doing so raise the countrys risk profile. With expectations of a growing deficit in the second quarter, this issue may once again be revisited and the fundamental interest in the kiwi may once again be jeopardy. A NZ$3.29 billion current account deficit wouldnt be a record breaking number, but it could easily overwhelm a struggling GDP report. Looking at the supplementary physical balance, the deficits were contained; so the current account is still up in the air.
A better than expected current account balance stands to catalyze a considerable move for the New Zealand dollar. NZDUSD has already received a strong push into an upside trend after the Federal Reserve cut the Federal Funds rate by half a percentage point and offered a greater incentive to be long the pair. A further drop in the deficit would only clear away doubts foreign investors may have in allocating their capital to a debt-risk New Zealand. Optimally, a long would be based on a print that is below the first quarter deficit. With confirmation from a green bar, a two lot position would be taken with a stop at the nearby swing low. The initial target on the first lot would equal risk and the second would be discretionary. To conserve profit, the stop on the second lot should be moved to break even when the first makes profit.
Should the current account shortfall balloon more than expected, the fear of a rising balance-to-GDP ratio could force the kiwi into a nose dive. The same entry rules for the long position would apply for the short, just in reverse. Since such a risk trade would go against the trend, clear signs of building momentum and volatility would be helpful.