The New Zealand dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the growth rate to contract 0.2% in the second-quarter, and fears of a slower recovery may lead businesses to scale back on production and employment in throughout the second-half of the year as global trade conditions remain weak.
[U][B]Trading the News: New Zealand Gross Domestic Product[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]09/21/2009 22:45 GMT, 18:45 EST[/B]
Primary Pair Impact : [B]NZDUSD[/B]
Expected: - 0.2%
Previous: -1.0%
[U]1Q 2009 New Zealand Gross Domestic Product[/U]
New Zealand’s GDP contracted 1.0% in the first-quarter amid expectations for a 0.7% decline, with the annualized rate tumbling 2.7% from the previous year, and fears of a protracted downturn may lead the Reserve Bank of New Zealand to take additional steps to stimulate the ailing economy as the outlook for growth and inflation remains weak. RBNZ Governor Alan Bollard projects economic activity to remain subdued until the fourth-quarter of 2009, and went onto say borrowing costs are likely to stay low going into the following year in an effort to jump-start the ailing economy. At the same time, Prime Minister John Key said that the rapid appreciation in the exchange rate “risks derailing” the economic recovery as global trade conditions remain weak, and the central bank may continue to ease policy further in the coming months to steer the nation out of recession.
[U]4Q 2008 New Zealand Gross Domestic Product[/U]
Economic activity in New Zealand contracted 0.9% in the second-quarter to mark the biggest decline since 1992, with the annual rate of growth falling 1.9% from the previous year, and growth prospects are likely to remain subdued throughout the first half of 2009 as global trade conditions falter. As a result, market participants anticipate the Reserve Bank of New Zealand to ease policy further over the coming months to soften the landing of the economy, and investors speculate the central bank to cut the benchmark interest rate by 25bp to a record-low of 2.75% in an effort to stem the downside risks for growth and inflation. Nevertheless, RBNZ Governor Alan Bollard anticipates economic activity to improve in the second-half of the year as the government takes unprecedented steps to jump-start the ailing economy however, as the IMF forecasts GDP to contract 2.0% this year, fears of protracted downturn may lead the central bank to maintain a dovish policy stance throughout 2009.
[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]How To Trade This Event Risk [/B]
The New Zealand dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the growth rate to contract 0.2% in the second-quarter, and fears of a slower recovery may lead businesses to scale back on production and employment in throughout the second-half of the year as global trade conditions remain weak. A report by Statistics New Zealand showed the jobless rate jumped to a nine-year high of 6.0% in the second-quarter as firms took additional steps to lower their cost structure, whileprivate wagesexcluding bonuses increased 0.3% from the first three-months of the year to mark the lowest level of growth since 1999. Moreover, the terms of trade indexslumped for the fifth consecutive quarter during the same period, led by a 11.6% drop in export prices, which is the biggest decline in 1951, and the marked appreciation in the exchange rate may continue to hamper the prospects for an ‘export-led’ recovery as the rise in the kiwi-dollar hinders the competitiveness of New Zealand exports. As a result, the Reserve Bank of New Zealand held the benchmark interest rate at 2.50% earlier this month and went onto say that the cash rate is expected to stay “at or below the currently level for some time” as policy makers see a risk for a “patchy recovery,” and the central bank is likely to hold a cautious tone going into the following year as Finance Minister Bill English deems the exchange rate to be “out of line with fundamentals.” Moreover, RBNZ Governor Alan Bollard stated that the appreciation in the New Zealand dollar remains “undesirable” and the rise continues to weigh on the outlook for corporate earnings as businesses face fading demands from home and abroad however, the central bank noted that the board has little room to stem the appreciation in the domestic currency as the “markets go through a risk-appetite-driven change in mood.” Accordingly, Mr. Bollard stated that “the sustainability of the present recovery” is likely to come into question as the exchange rate continues to push higher, and fears of a double-dip recession may lead the RBNZ to increase its verbal intervention as the board maintains its dual mandate to ensure price stability while fostering full employment. However, as [market sentiment](301 Moved Permanently sentiment)improves, investors speculate the central bank to tighten policy over the next 12 months, and the rise in the interest rate outlook may continue to drive the NZD/USD over the coming months as policy makers anticipate economic activity to improve throughout the second-half of the year.
Trading the given event risk favors a bearish outlook for the New Zealand dollar as economists forecast GDP to contract for the sixth consecutive quarter but nevertheless, price action following an enhanced growth report could set the stage for a long kiwi-dollar trade as the $128B emerges from the recession. Therefore, if the growth rate unexpectedly expands 0.2% or more from the first three-months of the year, 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 set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second objective 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 slump in global trade paired with the downturn in corporate profitability is likely to drag on economic activity going forward, and a dismal GDP reading is likely to stoke a weakened outlook for growth and inflation as the appreciation in the exchange rate hampers the prospects for an export-led recovery. As a result, if the growth rate contracts 0.2% or greater during the second quarter, we will favor a bearish outlook for the New Zealand dollar, and will follow the same setup for a short kiwi-dollar trade as the long position mentioned above, just in reverse.
