NZD/USD: Trading the New Zealand Retail Sales Report

Retail spending in New Zealand is expected to improve for the fifth consecutive month in December, with economists forecasting sales to increase 0.6% from the previous month, and the data is likely to encourage an enhanced outlook for the region as the economy recovers from its worst recession in three decades.

[U][B]Trading the News: New Zealand Retail Sales[/B][/U]
[U][B]
What’s Expected[/B][/U]
Time of release: 2/11/2010 21:45 GMT, 16:45 EST
Primary Pair Impact : NZDUSD
Expected: 0.6%
Previous: 0.8%
[U][B]
Impact New Zealand Retail Sales had over NZDUSD for the past 2 months[/B][/U]

[U]November 2009 New Zealand Retail Sales[/U]

                        New Zealand retail sales advanced 0.8% in November from an upward revision of 0.1% in the previous month, which topped  expectations  for a 0.5% rise, the Statistics New Zealand said in Wellington today. At the same time, core retail sales which exclude cars, fuel outlets and workshops, rallied 0.8%, and the data reinforces an improved outlook for the region as the economy emerges from the recession. Looking ahead, investors speculate the Reserve Bank of New Zealand to normalize policy this year as policy makers hold an improved outlook for growth and inflation, and expectations for a rate hike could drive the exchange rate higher as Governor Alan Bollard aims to hike the benchmark interest rate toward the middle of 2010.             [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.10_TTN2.jpg[/IMG]                [U]October  2009 New Zealand Retail Sales[/U]

                        Retail spending in New Zealand stalled in October after climbing 0.2% in September, and households may keep a lid on consumption throughout the remainder of the year as they face a weakening labor market paired with tightening credit conditions. Looking at the breakdown of the report, sales at supermarkets which approximately make up about a fifth of overall spending dived 1.1% from September, while sales at cafes and restaurants leapt 10%, the Statistics New Zealand announced in Wellington. Meanwhile, core sales added 0.5%,and the Reserve Bank of New Zealand may keep rates on hold going into the following year as policy makers aim to encourage a sustainable recovery in the $128B economy.             [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.10_TTN3.jpg[/IMG]                [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:

                        [U][B]Bullish Scenario:[/B][/U]
        
        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.             [U][B]Bearish Scenario:[/B][/U]
        
        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.                               [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00001_NZD.jpg[/IMG]             [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00002_NZD.jpg[/IMG]                [B]How To Trade This Event Risk [/B]

Retail spending in New Zealand is expected to improve for the fifth consecutive month in December, with economists forecasting sales to increase 0.6% from the previous month, and the data is likely to encourage an enhanced outlook for the region as the economy recovers from its worst recession in three decades. However, economic activity in the isle-nation expanded less-than-expected in the third quarter, with the growth rate climbing 0.2% from the three-months through June amid expectations for a 0.4% rise, while the jobless rate jumped to a 10-year high of 7.3% in the fourth-quarter, led by a 0.3% drop in full-time employment. Moreover, average hourly earnings unexpectedly slipped 0.4% during the last three-months of 2009, and households may keep a lid on spending throughout the first-half of the year as they face a deteriorating labor market paired with tightening credit standards.

Nevertheless, the Reserve Bank of New Zealand held the benchmark interest rate at the record-low of 2.50% in January and said that the central bank will begin to normalize policy “around the middle of 2010” as economic conditions improve. The RBNZ expects the economy to grow at an annualize pace of 3.0% this year and 4.1% in 2011, and went onto say that the “policy stimulus and improving earnings have seen a pickup in household spending. However, as the central bank expects price pressures to remain subdued and sees inflation “track comfortably within the band over the medium term,” Governor Alan Bollard may hold a dovish outlook for future policy as the board aims to encourage a sustainable recovery throughout the region. At the same time, Mr. Bollard argued that “households remain cautious, with credit growth subdued,” and the central bank may continue to support the real economy as “business spending remains weak.”

Trading the given event risk favors a bullish outlook for the New Zealand dollar as market participants anticipate private spending to increase for the fifth month in December, and price action following the release could set the stage for a long kiwi trade as growth prospects improve. Therefore, if sales advanced 0.6% or greater from the previous month, we would need to see a green, five-minute candle following the report to generate a buy entry on two-lots of NZD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will be used to establish 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 an effort to lock-in our profits.

On the other hand, the ongoing weakness in the labor market paired with tightening credit conditions may lead consumers to scale back on spending, and a dismal consumption report could drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if sales holds flat or unexpectedly contracts in December, we will favor a bearish outlook for the New Zealand dollar, and will utilize the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.

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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]