The New Zealand consumer price index is expected to increase for the second consecutive quarter, with economists forecasting a 0.5% rise from the three-months through March, and the rebound in price growth could reinforce an improved outlook for future policy as market participants anticipate the central bank to raise borrowing costs over the next 12 months.
[B][U]Trading the News: New Zealand Consumer Prices
Time of release: [B]07/15/2009[/B][B] 22:45GMT, 18:45 EST[/B]
Primary Pair Impact[B] : NZDUSD[/B]
Impact the RBNZ Interest Rate Decision has had on NZDUSD through the last 2 meeting[/U][/B]
[U]1Q [/U][U]New Zealand[/U][U] Consumer Prices[/U]
Consumer prices in New Zealand increased 0.3% during the three-months through March, with the annual rate of inflation falling to 3.0% from 3.4% from in the fourth quarter, and the Reserve Bank of New Zealand may take further steps to shore up the $128B economy as price pressures deteriorate. A Bloomberg News survey shows 8 of the 10 economists polled forecast the central bank to lower the benchmark interest by another 50bp to a record-low of 2.50% later this month in an effort to stem the downside risks for growth and inflation, and policymakers may continue to take unprecedented steps to stimulate the ailing economy as the OECD calls upon Governor Alan Bollard to lower the cash rate to 2.00%. As a result, the New Zealand dollar may continue to weaken against its currency counterparts over the near-term as the RBNZ maintains a dovish outlook for future policy.
4Q New Zealand Consumer Prices[/U]
Price growth in New Zealand fell 0.5% in the fourth quarter on the back of lower energy prices, and the drop in prices pressures could lead the central bank to take additional step to stimulate the ailing economy as growth prospects deteriorate. As the nation faces its first recession in a decade, the Reserve Bank of New Zealand forecasts inflation to remain subdued throughout 2009, and Governor Ala Bollard may continue ease policy further as the board maintains a dovish outlook for price growth. As a result, market participants speculate the RBNZ to lower the benchmark interest rate by another 100bp later this month to a record-low of 4.00% in an effort to stem the downside risks for growth and inflation, and expectations for lower borrowing costs is likely to drag on the New Zealand dollar as policymakers take unprecedented steps to steer the $128B economy out of the recession.
[B]What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on NZDUSD ahead of the data release.
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on NZDUSD ahead of the data release.
How To Trade This Event Risk[/B]
The New Zealand consumer price index is expected to increase for the second consecutive quarter, with economists forecasting a 0.5% rise from the three-months through March, and the rebound in price growth could reinforce an improved outlook for future policy as market participants anticipate the central bank to raise borrowing costs over the next 12 months. A report by the ANZ National Bank showed commodity export prices rose for the fourth month in June, led by higher costs for lumber and aluminum, while food costs increased in four of the five months through May, and price pressures may continue to strengthen over the second-half of the year as the government takes unprecedented steps to stimulate the ailing economy. At the same time, the 1Q GDP report showed economic activity contracted for the fifth consecutive quarter following the slump the private-sector spending, and the data foreshadows a weakening outlook for growth and inflation as businesses continue to scale back on production and employment in order to weather the downturn in global trade. Moreover, a separate report showed producer input prices unexpectedly plunged 2.5% in the first quarter to mark the biggest decline since recordkeeping began in 1977, led by the drop in crude oil prices, and the outlook for inflation remains weak as the Reserve Bank of New Zealand forecasts consumer prices to grow at an annual rate of 2.2% over the next two-years. Meanwhile, a Bloomberg News survey shows 11 of the 12 economists polled forecast the RBNZ to hold the benchmark interest rate at the record-low later this month in order to steer the nation out of the recession, and the central bank is widely expected to keep borrowing costs on hold as policymakers maintain a dovish outlook for future prices. However, policymakers in New Zealand remained fearful of a protracted economic downturn as ’unduly high interest costs could lead to the closure of businesses that may be fundamentally sound,’ and the RBNZ may take additional steps to stem the downside risks for price growth as Governor Alan Bollard sees scope for lower borrowing costs. Moreover, the central bank head warned that the appreciation in the exchange rate could limit the prospects for ‘an export-led recovery’ as global trade conditions remain weak, and the board may continue to ease policy further in the second-half of the year as economic activity falters.
Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, expectations for a 0.5% in the consumer price index favors a bullish outlook for the New Zealand dollar as market participants anticipate the RBNZ to hold the benchmark interest at the record-low going forward. As a result, if the CPI rises 0.5% or higher in the second quarter, we will look for a green, five-minute candle following the release to confirm a buy entry on two lots of NZD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first objective. Our second target will be based on discretion, and we will move the stop on the second-lot to breakeven once the first trade reaches its target in order to lock-in our profits.
On the other hand, the downturn in global trade paired with the slump in commodity prices is likely to reinforce a weakening outlook for inflation over the near-term, and price action following the release could set the stage for a short New Zealand dollar trade. As a result, if consumer prices unexpectedly fall 0.2% or greater, we will favor a bearish outlook for the high-yielding currency, and we will follow the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse.
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