The New Zealand dollar is likely to face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 1.0% in the first quarter, and the labor report is likely to reinforce a weakening outlook for the region as the jobless rate is anticipated to reach 5.3% in the three-months through March, which would be the highest level since September 2002.
[B][U]Trading the News: New Zealand Employment Change[/U][/B][B][/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]05/06/2009 22:45 GMT, 18:45 EST[/B]
Primary Pair Impact[B] : NZDUSD[/B]
Expected: -1.0%
Previous: 0.9%[B][/B]
Impact the New Zealand Employment Change had on NZDUSD over the last 2 quarters
[U]4Q 2008 New Zealand Employment Change[/U]
Employment in New Zealand rose 0.9% in the fourth quarter despite forecasts for a 0.7% drop, while the annual rate of unemployment rose to a five-year high of 4.6% from 4.2% in the previous quarter, and labor conditions are likely to get worse this year as businesses scale back on production and employment in an effort to reduce costs. The breakdown of the report showed full-time jobs increased 6K from the previous quarter, while the participation rate rose to a record of 69.3% from 68.7%, and demands for employment are likely to weaken further as the region faces a deepening recession. As the outlook for growth and inflation falter, policymakers are likely to step up their efforts in order to steer the $128B out of a recession, and RBNZ Governor Alan Bollard is expected to lower the benchmark interest rate by another 75bp to 2.75% as the economic downturn intensifies.
[U]3Q 2008 New Zealand Employment Change[/U]
Labor demands in New Zealand increased 0.1% in the third quarter amid expectations for a 0.6% drop, while the jobless rate surged to a 4.2% from 3.9% in the previous quarter, which is the highest since December 2003. A deeper look at the report showed full-time positions increased 8K during the quarter, while the participation rate rose to a record high of 68.7% however, labor conditions are likely to deteriorate over the next few quarters as the region faces its first recession in a decade. As a result, the Reserve Bank of New Zealand is widely expected to ease policy further, and market participants anticipate the central bank to lower the overnight interest rate by another 150bp to 5.00% next month in an effort to shore up the $128B economy. The extraordinary efforts should help to stem the downside risks for growth and inflation however, the economic outlook for New Zealand remains bleak as the isle-nation faces a deepening downturn.
[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:
[B][U]Bullish Scenario:[/U][/B]
[B][U][/U][/B]
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 AUD 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 AUDUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
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 AUD 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 AUDUSD ahead of the data release.
[B]How To Trade This Event Risk[/B]
The New Zealand dollar is likely to face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 1.0% in the first quarter, and the labor report is likely to reinforce a weakening outlook for the region as the jobless rate is anticipated to reach 5.3% in the three-months through March, which would be the highest level since September 2002. The New ZealandGDP report showed the economy contracted 0.9% in the fourth quarter to mark its biggest decline since 1992 as exports dropped 3.3% from the previous quarter, while retail spending slipped throughout the previous year to post its biggest downturn on record, and the data reinforces a weakening outlook for growth and inflation as private-sector spending accounts for more than half of the economy. In addition, a report by the New Zealand Institute of Economic Research said business confidence plunged to a 35-year low in the first quarter as manufacturing sales slumped last year, while a separate report showed outputs fell for the 11th month in March, and the conditions are likely to get worse this year as firms continue to scale back on production and employment in order to reduce costs. As a result, the International Monetary Fund lowered its growth forecast for New Zealand and expects the annual rate of growth to fall 2.0% this year as the downturn in the global economy intensifies, and has called for the Reserve Bank of New Zealand to lower the benchmark interest rate to 2.00% in order to avoid a deepening contraction throughout the region. At the same time, RBNZ Governor Alan Bollard cut the overnight lending rate by 50bp to a record-low of 2.50% last month, and said that policymakers ‘expect to keep the cash rate at or below the current level through until the latter part of 2010’ in an effort to steer the $128B economy out of its worst recession in over three-decades. As the central bank head expects the downturn to carry through into the next year, Dr. Bollard said that the unemployment rate may reach a 10-year high of 6.8% in the beginning of 2010, and went onto say that policymakers are ‘trying to avoid the premature expectations of recovery that we’ve seen over the last month in some economies because ultimately they can prove damaging,’ and the comments suggests that the RBNZ may lower borrowing costs further as growth and inflation falter. Nevertheless, as risk trends continue dictate price action in the currency market, the rise in market sentiment paired with a less than expected drop in employment could boost demands for the New Zealand dollar as market participants move into higher risk/reward investments.
Expectations for a 1.0% drop in employment favors a bearish outlook for the high-yielding currency however, the unexpected rise during the past two quarters has left the door open for an upward surprise, and price action follow an enhanced labor report could set the stage for a long kiwi trade as investors raise their appetite for risk. Therefore, if employment increases 0.2% or more in the first quarter we will look for a green, five-minute candle to confirm a buy entry on two-lots of NZD/USD, and once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first target. 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 preserve our profits.
On the other hand, the downturn in global trade paired with fears of a deepening recession may lead firms to cut their labor force, and a surge in the jobless rate is should weigh on the exchange rate as growth prospects deteriorate. As a result, an in-line print or a drop of more than 1.0% would favor a bearish outlook for the New Zealand dollar, 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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