Trade Balance (MoM) (APR) (22:45 GMT)
Trade Balance (YoY) (APR) (22:45 GMT) Expected: -NZ$0.01B Expected: - NZ$5.82B Previous: NZ$0.06B Previous: - NZ$5.78B
How Will The Markets React?
Domestic consumption is undoubtedly the New Zealand economy?s bread and butter. However, international trade is clearly a main artery in its own right. Before New Zealanders began their long-lasting shopping spree, exports of commodities and manufactured goods sustained growth. While expansion has forged ahead with the help of domestic spending, trade has clearly suffered in the background. For the month of April, economists expect the balance to once again slip into a modest deficit after reporting its first positive number in ten months. At the same time, the preferred year-over-year number (favored over the monthly figure since it is not seasonally adjusted) is projected to hit the wires with a wider NZ$5.82 billion deficit. Both outlooks come to the same conclusion - that the 18 percent appreciation in the New Zealand currency over the past year is crimping sales abroad and offering a cheaper alternative for local shoppers in imports. Suffering exporters and rampant consumer spending have long been an issue for the policy makers and were addressed recently by Finance Minster Michael Cullen. In a recent statement Cullen said he wants to see local spending habits cool so that rates may be cut by next year allowing for relief for the local currency. This was just one of many efforts made by officials to verbally talk down the local currency. The reality of the situation though is that international investors know RBNZ Governor Alan Bollard has based the future of interest rates on strength in both domestic spending and the housing market. Therefore, even if the trade deficit ballooned to a new record, the central bank would be no closer to cutting the record high overnight lending rate. On the other hand, as local firms suffer from the high currency, the steady pass through to consumers draws that eventual cut ever closer.
Bonds - 10-Year New Zealand Government Bond Futures
Despite RBNZ Governor Bollard?s decidedly neutral turn at the last monetary policy meeting, yields have held their ground. Ultimately, the warning that consumer spending and housing sector inflation are still threats to price growth has led traders to believe the rate cut that so many investors have worried about will not be realized until the data paves the way. Waiting in the wings, the physical trade account for April sets up the next pertinent indicator - though the market?s reaction to the release can be very different depending on its direction. Should the deficit expand as expected, it may have little impact on yields since it would not provide the impetus for a rate cut. Alternatively, an improvement would negate officials? concerns over interest rates and the currency; and could help rally yields to 6.265.
FX - NZDUSD
Since hitting resistance near the .7500 level in March, NZDUSD has been steadily declining as it becomes increasingly unlikely that the Reserve Bank of New Zealand will take interest rates any higher than their current record of 7.75 percent. Now, the pair has come to a crossroads as technical levels show price hesitating at support at .7255. However, the release of the nation?s trade balance for the month of April could determine the New Zealand dollar?s next move, as the figure is anticipated to show a deficit of NZ$0.01 billion. Such a report will likely reflect that consumption continues to propel imports while exports suffer at the hands of a strong New Zealand dollar. This is would give mixed signals to traders of the New Zealand dollar, as hot consumer spending has been cited as a possible reason for the RBNZ to consider raising rates again - which is highly bullish for NZDUSD. However, softer export growth bodes very ill for GDP, leaving the central bank little room to tighten policy further. Given the amount of underlying support below, NZDUSD could be in for a bounce above .7300, but given nature of this recent downtrend along with softer outlooks for the New Zealand economy, the pair could fall below .7255 shortly after.
Equities - NZX 50 Index
New Zealand share prices closed little changed after hitting a record high of 4,319.54 earlier in the session, with the NZX-50 index down 0.1 percent to 4,289.59. Top stock Telecom eased back NZ$0.03 to NZ$4.79, while profit taking pushed Fletcher Building down NZ$0.20 to NZ$12.65. Meanwhile, SkyCity closed up NZ$0.16 at NZ$5.08 after announcing cost-cutting plans and possible asset sales. Trade in New Zealand equities could become quite volatile tomorrow, however, with the trade balance anticipated to show a deficit of NZ$0.01 billion as consumption continues to propel imports while exports suffer at the hands of a strong New Zealand dollar. This is overtly negative for the NZX 50 index for two reasons: 1) resilient consumption growth will only lead the Reserve Bank of New Zealand to maintain their tightening bias and 2) softer export growth bodes very ill for major companies listed in the New Zealand?s benchmark index, such as Fisher & Paykel. Furthermore, given the rapid retracement of the NZX 50 index during trading yesterday, technical factors signal that equities could be in for a decline towards a supporting trendline near 4,250.00.