Retail spending in New Zealand is anticipated to drop another 0.5% in February as households face a weakening labor market paired with falling home prices, and the outlook for growth and inflation remains bleak as private-sector spending accounts for more than half of the economy.
[B][U]Trading the News: New Zealand Retail Sales
What’s Expected[/U][/B]
Time of release: [B]04/13/2009 22:45GMT, 18:45 EST[/B]
Primary Pair Impact[B] : NZDUSD[/B]
Expected: -0.5%
Previous: -1.1%[B][U]
[/U][/B]Impact the New Zealand Retail Sales had on NZDUSD through the last 2 months
[U]January 2009 New Zealand Retail Sales[/U]
Private-sector spending dropped another 1.1% in January following the 0.7% decline in the previous month, and conditions are likely to get worse as the region faces its worst recession in over a quarter century. The breakdown of the report showed that auto sales plunged 11.0% from the previous month, while gasoline receipts dropped another 2.6% during the month, and the outlook for personal consumption remains bleak as households face a weakening labor market paired with fears of a deepening recession. Meanwhile, after cutting the cash rate by another 50bp to 3.00% this week, RBNZ Governor Bollard said that the interest rate is at a ‘very stimulatory’ level and expects the economy to grow in the third quarter, but went onto say that the key rate may fall by another 50bp in the month ahead as the downturn in the global economy intensifies.
[U]December 2008 New Zealand Retail Sales[/U]
Retail sales in New Zealand fell for the fourth consecutive quarter in 2008 as demands slipped another 1.0% in December to mark the worst slump on record, and the outlook for private spending remains bleak as the economic downturn in the region intensifies. A deeper look at the report showed that gasoline receipts plunged 8.4% during the month, while demands for fresh produce dropped 8.8% from the previous month, and households may continue to cut back on spending as the labor market deteriorates at a rapid pace. As a result, the Reserve Bank of New Zealand is widely expected to lower the benchmark interest by another 75bp to 2.75% next month as growth and inflation falter, and may take additional steps in the months ahead to shore up the $128B economy as the region faces a deepening recession. At the same time, Governor Bollard continued to reinforce a positive outlook for long-term growth he expects the economy to recover in the second-half of the year.
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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]
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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.
[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 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.
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[B]How To Trade This Event Risk[/B]
Retail spending in New Zealand is anticipated to drop another 0.5% in February as households face a weakening labor market paired with falling home prices, and the outlook for growth and inflation remains bleak as private-sector spending accounts for more than half of the economy. The fourth quarter GDP report showed that 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 private-wages grew at a slower pace during the same period, and conditions are likely to get worse throughout the first half of the year as households turn increasingly pessimistic towards the economy. Moreover, retail sales excluding inflation slipped another 0.6% during the fourth quarter to post its worse slump on record, while the Westpac confidence report showed that 57% of the consumers surveyed expect the economic downturn to get worse over the next 12 months, and as the jobless rate remains at a five-year high, fading demands for employment is likely to weigh on household spending as firms continue to cut back on production and investments in an effort to reduce costs. As a result, the Reserve Bank of New Zealand lowered the benchmark interest rate by 50bp to a record-low of 3.00% last month in an effort to soften the landing of the economy, and the central bank went onto say that there remains a possibility for another 50bp at the next policy meeting as the economic downturn in the international environment deepens. A Bloomberg News survey shows that 6 of the 9 economists polled expect the RBNZ to lower the benchmark interest rate by half a percent to 2.50% but nevertheless, comments by Governor Alan Bollard suggests that the central bank is nearing the end of its easing cycle as he sees the interest rate at a ‘very stimulatory’ level. As Mr. Bollard remains reluctant to overshoot the interest rate and anticipates the economy to grow in the third quarter, long-term expectations for higher borrowing costs could boost demands for the commodity currency however, as the economic outlook continues to reinforce a weakening outlook for growth and inflation, deteriorating fundamentals are likely to weigh on the exchange rate as the $128B economy faces its worst recession since 1977.
Expectations for a 0.5% drop in household spending clearly favors a bearish forecast for the New Zealand dollar however, an enhanced sales report would certainly set the stage for a long kiwi-dollar trade for the given event risk. Therefore, if private consumption increases 0.1% or more in February, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of NZD/USD, and 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 target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, fears of a deepening recession paired with a weakening labor market is likely to weigh on households, and a drop in retail spending would only reinforce a dour outlook for growth and inflation, which could lead the RBNZ to ease policy further. As a result, an in-line print or a drop of more than 0.5% in sales would lead us to sell the commodity currency, and we will follow the same strategy for a short kiwi-dollar trade s the long position mentioned above, just in reverse.
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