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

Trading the News: New Zealand 3Q GDP

Why Is This Event Important:

Economic activity in New Zealand is widely expected to expand at a slower pace in the third quarter, and the data could spark a selloff in the exchange rate as the outlook for future growth deteriorates. As the isle-nation copes with with the worst earthquake in eight decades, the Reserve Bank of New Zealand lowered its economic forecast for the region, and the central bank may retain its wait-and-see approach throughout the beginning of the following year as it aims to encourage a sustainable recovery.

What’s Expected:

Time of release:12/22/2010 21:45 GMT, 16:45 EST

Primary Pair Impact :NZDUSD

Expected: 0.1%

Previous: 0.2%

Will This Be Market Moving (Scenarios):

New Zealand’s growth rate is forecasted to rise 0.1% in the third quarter following the 0.2% expansion during the three-months through June, and economic activity may weaken further over the coming months as the rebound in global trade tapers off. In turn, a dismal 3Q GDP report could spark a bearish breakout in the NZD/USD as it maintains the downward trend from the November high (0.7975), and the RBNZ may continue to talk down speculation for additional monetary tightening at its next interest rate decision on January 26 given “weak domestic demand and the constraining effects of the high New Zealand dollar.”

The Upside

A report by the Statistics New Zealand showed household spending unexpectedly jumped 0.7% in the third quarter, with employment advancing 1.0% during the same period to mark the fastest pace of growth since the second-quarter of 2008, and the improvement in private-sector activity could foster a better-than-expected GDP report as central bank President Alan Bollard expects the cleanup of the earthquake to “add to GDP growth.” A marked rise in the growth rate could lead the New Zealand dollar to retrace the decline from earlier this month, and the NZD/USD may work its way back towards the 50-Day moving average at 0.7596 as the fundamental outlook improves.

The Downside

However, as households and businesses face higher borrowing costs paired with a depressed housing market, the ongoing weakness in the real economy may continue to bear down on private sector consumption, and the RBNZ may hold a neutral policy stance in 2011 as the economic outlook remains clouded with high uncertainty. A dismal GDP reading could certainly exacerbate the recent decline exchange rate and lead the kiwi-dollar to retrace the rebound from earlier this week as interest rate expectations falter.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades but a larger-than-expected expansion in GDP could pave the way for a long New Zealand dollar trade as growth prospects improve. As a result, if the growth rate increases greater than 0.2%, we will need to see a green, five-minute candle following the report to establish a buy entry on two-lots of NZD/USD. Once these conditions are fulfilled, 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 breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the ongoing slack within the private sector paired with the slowdown in global trade is likely to bear down on the recovery, and a dismal GDP report could trigger a sharp selloff in the exchange rate as the RBNZ holds a cautious outlook for the region. Therefore, if the growth rate holds flat or unexpectedly contracts from the previous quarter, we will implement the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.

Potential Price Targets For The Release

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

2Q New Zealand GDP

Economic activity in New Zealand expanded 0.2% in the second quarter amid forecasts for a 0.7% rise, and the slower pace of growth may lead the central bank to maintain a wait-and-see approach throughout the second-half of the year as it aims to encourage a sustainable recovery. The breakdown of the report showed manufacturing slumped 4.0% during the three-months through June, with agricultural outputs slipping 2.1%, while construction advanced 6.4% after expanding 0.8% during the first three-months of the year. As the region copes with the worst earthquake in eight decades, the Reserve Bank of New Zealand talked down speculation for higher interest rates after lowering its economic forecast for the region, and the central bank may keep the benchmark interest rate at 3.00% over the coming months in an effort to balance the risks for the real economy.

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