NZD/USD: Trading the Change in New Zealand Employment

Trading the News: New Zealand Employment Change

Why Is This Event Important:

However, as Reserve Bank of New Zealand Governor Alan Bollard sees ongoing weakness within the real economy and argues that the recent appreciation in the exchange rate “is inconsistent with the softening in New Zealand’s economic outlook,” the high-yielding currency may show little reaction to the fundamental developments as investors scale back expectations for another rate hike this year.

What’s Expected:

Time of release: 08/04/2010 22:45 GMT, 18:45 EST

Primary Pair Impact: NZDUSD

Expected: 0.4%

Previous: 1.0%

Will This Be Market Moving (Scenarios):

Employment in New Zealand is forecasted to increase 0.4% in the second quarter following the 1.0% jump during the first three-months of the year, while the jobless rate is projected to rise to 6.2% from 6.0% as discouraged workers return to the labor force. The mixed batch of data could spark increase volatility in the exchange rate, but the shift in market sentiment could play a greater role in driving price action as risk trends continue to dictate price action in the foreign exchange market.

The Upside

As the region continues to benefit from the rise in global trade, with businesses increasing their rate of production, firms may widen their labor force at a faster pace as growth prospects improve. As the recovery gathers pace, the RBNZ may continue to normalize policy in the second-half of the year, and expectations for another rate hike could push the exchange rate back above 0.7400 as it continues to retrace the decline from earlier this year.

The Downside

However, as business confidence weakens for the second consecutive month in July, with the recovery leveling off, firms may keep a lid on employment in an effort to keep profits afloat. Accordingly, a dismal labor report is likely to weigh on the outlook for future growth, and could lead the New Zealand dollar to retrace the advance from the previous month as growth prospects deteriorate.

How To Trade This Event Risk

Expectations for a rise in employment certainly favors a bullish outlook for the high-yielding currency, and price action following the report could set the stage for a long New Zealand dollar trade as the prospects for future growth improves. Therefore, if job placements increase 0.4% or greater in the second quarter, we will need to see 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 the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reach its mark in an effort to lock-in our profits.

In contrast, uncertainties surrounding the outlook for future growth paired with the slack within the real economy could weigh on the labor market, and a dismal employment report could spur a selloff in the exchange rate as the outlook for growth falters. As a result, if employment increases less than 0.2% or unexpectedly contacts from the first-quarter, we will favor a bearish outlook for the high-yielding currency, and will implement the same setup for a short kiwi-dollar trade as the long position laid out above, just in reverse.

Impact New Zealand Employment has had over the NZD during the last quarter

1Q 2010 New Zealand Employment Change

Employment in New Zealand surged 1.0% in the first quarter, which well exceeded forecasts for a 0.2% rise, while the jobless rate tumbled to 6.0% from a revised 7.1% in the last three-months of 2009 to mark the largest decline since recordkeeping began in 1986. The breakdown of the report showed full-time positions increased 1.6%, with the participation rate holding steady at 68.1%, while part-time employment slipped 0.6%. As the recovery gathers pace, with the outlook for future growth improving, the Reserve Bank of New Zealand is likely to raise its assessment for the economy and may see scope to normalize policy in the second-half of the year . As a result, investors may raise speculation for a rate hike, and the rebound in interest rate expectations could drive the exchange rate higher over the near-term as investors weigh the prospects for future policy.

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.

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