NZD/USD: Trading the New Zealand 3Q GDP Report

Trading the News: New Zealand Gross Domestic Product

What’s Expected
Time of release:        12/22/2009 21:45 GMT, 16:45 EST
Primary Pair Impact :    NZDUSD
Expected:         0.4%
Previous:         0.1%

Impact the New Zealand GDP report has had on NZDUSD over the last 2 quarters

2Q 2009 New Zealand Gross Domestic Product

New Zealand’s economy emerged from the recession in the second quarter as the growth rate unexpectedly expanded 0.1% from the first three-months of the year, while the annualized rate slipped 2.1% from the previous year after contracting a revised 2.6% in the first quarter. The breakdown of the report showed private spending increased 0.4% after tumbling 1.2% during the first quarter, with business investments rising 1.3% during the same period, while exports surged 4.7% after growing 0.6% during the first three-months of the year. As a result, market participants speculate the Reserve Bank of New Zealand to normalize policy faster than previously announced as growth prospects improve however, Governor Alan Bollard may hold a dovish outlook for future policy as he anticipates to see a “patchy recovery”  over the following year.

1Q 2009 New Zealand Gross Domestic Product

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.

What To Look For Before The Release

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:

Bullish Scenario: 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.

Bearish Scenario: 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.

How To Trade This Event Risk

The New Zealand dollar is likely to face increased volatility over the next 12 hours of trading as economists forecast the growth rate to expand at a faster pace in the third quarter, and a 0.4% expansion in GDP could drive the exchange rate higher as policy makers hold an improved outlook for the $128B economy. At the same time, the drop in market liquidity is likely to produce difficult trading conditions, and we may see choppy price action following the release as investors go off-line ahead of the Christmas Holiday. Nevertheless, retail spending in the isle-nation unexpectedly increased 0.1% in the third quarter after rising a revised 0.5% during the three-months through June, while private wages excluding overtime advanced 0.4% during the same period to top expectations for a 0.3% rise. However, a separate report showed employment slipped 0.8% from the second quarter, which exceeded projections for a 0.3% drop, and pushed the jobless rate to a nine-year high of 6.5% from 6.0% during the three-months through June. At the same time, manufacturing activity slumped 5.1% for the second consecutive quarter, while the terms of trade unexpectedly slipped 1.3% after contracting a revised 9.4% in the second quarter, and the marked appreciation in the exchange rate may continue to hamper the prospects for an export-led recovery as global trade conditions remain subdued. Nevertheless, the Reserve Bank of New Zealand held the benchmark interest rate at the record-low of 2.50% earlier this month, and said that the “recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the cash rate and bank funding costs, reduces the need for more immediate action” as policy makers anticipate the economy to return to growth going into the following year. The RBNZ forecasts economic activity to increase at an annual pace of 1.9% in the first quarter of 2010 as the expansion in monetary and fiscal policy continues to feed through the real economy, and expects GDP to rise 4.2% by the first quarter of 2011 as global trade conditions improve. As a result, the central bank sees scope to normalize policy “around the middle of 2010” as the board maintains its dual mandate to ensure price stability while promoting future growth, but went onto say that that rebound in economic activity is likely to be “patchy” as businesses continue to keep a lid on production and employment. The hawkish rhetoric paired with the rise in the growth forecast has certainly helped to boost interest rate expectations for New Zealand, and speculation for a RBNZ rate hike during in the middle of 2010 may keep the New Zealand dollar bid going into the following year as policy makers hold an improved outlook for the $128B economy.

Trading the given event risk may not be as clear cut as some of our previous trades given the drop in market liquidity but nevertheless, a rise in the growth rate is likely to drive the New Zealand dollar higher as policy makers hold a hawkish outlook for future policy. Therefore, if GDP expands 0.4% or greater in the third quarter, we will need to a see a green, five-minute candle following the release 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 taking volatility into account, and this risk will 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 order to preserve our profits.

In contrast, the drop in production paired with the slump in global trade are likely to weigh on the real economy, and price action following a dismal GDP reading could set the stage for a short New Zealand dollar trade. As a result, if the growth rate expands 0.1% or less, we will favor a bearish outlook for the NZD/USD, and will follow the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com