Trading the News: New Zealand Retail Sales

[B][U]What is Expected[/U][/B]
Time of release: [B]07/12/2007 22:45 GMT, 18:45EST[/B]
Primary Pair Impact : [B]NZD/ USD
[/B]Expected: [B]0.5%
[/B]Previous: -1.2%

[B]How To Trade This?[/B]
Retail sales is a key indicator for the New Zealand dollar. Reserve Bank of New Zealand Governor Alan Bollard has clearly stated and previous rate decisions that he would retain his hawkish stance until consumer spending and housing sector growth cool - this after hiking the nation?s overnight lending rate at three consecutive meetings to bring the target rate to a nine-year high 8.00 percent. This places considerable weight on the indicator?s shoulders. However, it is interesting to take note of the price action after the April sales report. Thought NZDUSD sold off on considerable 1.2 percent drop, the pair quickly went back to the bulls in no more than five minutes. Such a strong reversal suggests there is a considerable bias underpinning this trade that is controlled by interest rate hawks who believe the RBNZ will hike once again regardless of the data. Another contributing factor is the low liquidity in the markets during the New Zealand session. With few traders online to provide follow through, momentum cannot build behind the initial reaction.
Given the buoyancy provided the kiwi by the interest rate bias, a positive report would likely be the best case scenario for a trade. Expectations for May?s sales report are modest, which leaves the door open to a hefty surprise. Should the indicator come largely in line with the 0.5 percent consensus, a first target of the 0.7480 range high would be reasonable depending on where spot is prior to the release. Upping the ante, a stronger-than-expected number could send the kiwi over the aforementioned ceiling and on to retest the recently tested 25-year highs at 0.7880. Taking into account the historical price action after the retail reports, this trade would likely be more affective as a follow through trade that could be held through to the close of the Monday US session. The bulk of the immediate move will most likely be lost to the five-minute confirmation bar, but we do not advocate forgoing this important entry requirement.
A short based on a disappointing sales report would counter the bigger trends underlying the kiwi dollar and NZDUSD. Taking the price action following the April report as a template, even a considerable disappointment could ultimately turn back to the bull?s favor after the trade is confirmed. Therefore, we will look for a considerable drop in sales to initiate a short. Stops can be set up at the nearby swing levels depending on the initial volatility of the first five minutes. The nearby target of 0.7715 would need to be captured in follow through, but if the report can stoke concerns that another rate hike is doubtful, it can certainly make it there.