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NZD/USD: Trading the New Zealand 1Q Retail Sales Report

NZD/USD: Trading the New Zealand 1Q Retail Sales Report

2010-05-12 19:08:00
David Song, Currency Strategist
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Trading the News: New Zealand 1Q Retail Sales

Why Is This Event Important:

As the Reserve Bank of New Zealand expects the rebound in economic activity to “pick up further through 2010,” a rise in retail sales would certainly give the central bank scope to normalize policy further in the second-half. Central Bank President Alan Bollard said he will “begin removing policy over the coming months” after holding the benchmark interest rate steady at 2.50% last month, and went onto say that inflation is expected “to track within the target range over the medium term.”

What’s Expected:

Time of release:        05/13/2010 22:45 GMT, 18:45 EST
Primary Pair Impact :    NZDUSD
Expected:         0.3%
Previous:         1.0%

Will This Be Market Moving (Scenarios):

With unemployment falling back to 6.0% from a revised 7.1% in the fourth-quarter, market participants forecast household spending to increase 0.3% in the first three-months of 2010, and the data is likely to encourage an improved outlook for future growth as RBNZ Governor Bollard sees the recovery “in line with or slightly faster” than the March forecast. As a result, investors a pricing a 70% chance for a 25bp rate hike at the next rate decision on June 9th according to Credit Suisse overnight index swaps, while they expect the interest rate to rise by nearly 200bp over the next 12 months.

The Upside


As manufacturing and service- based activity expands at the fastest pace in two-years, businesses may look to expand their labor force at an accelerated pace in 2010, which could lead households to increase their temperament to spend. As a result, a bigger-than-expected rise in private consumption could lead the NZD/USD to pare the decline from earlier this week as the economic recovery gathers pace.

The Downside


At the same time, the central bank warned that the “risks to the global outlook remain elevated” and noted that “households remain cautious, with the housing market and hold credit growth subdued,” and consumers may keep a lid on spending over the coming months as they continue to face tightening credit standards. A dismal sales report could drag on the outlook for growth and inflation , which could stoke increased selling pressures on the New Zealand dollar as investors weigh the prospects for a sustainable recoery.

How To Trade This Event Risk


Trading the given event favors a bullish outlook for the New Zealand dollar as market participants expect retail spending to increase for the fourth consecutive quarter, and price action following the release could set the stage for a long kiwi-dollar trade. Therefore, if sales expands 0.3% or greater in the first-quarter, we will need a green, five-minute candle subsequent to the data to generate a buy entry for two-lots of NZD/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, tightening credit conditions paired with the uncertainties surrounding the outlook for the global economy may lead consumers to curb their temperament to spending, and a dismal sales report could lead the exchange rate to tip lower as growth prospects deteriorate. As a result, if sales increases less than 0.2% or unexpectedly contracts during the first three-months of 2010, we will favor a bearish outlook for the New Zealand dollar, and will follow the same setup for a short kiwi-dollar trade as the long position laid out above, just in reverse.

05.12_TTN1

Impact that Retail Sales has had on NZD during the quarter

05.12_TTN2

4Q 2009 New Zealand Retail Sales

Retail sales in New Zealand increased 1.0% in the fourth quarter, which fell short of expectations for a 1.4% expansion, and households may keep a lid on spending in 2010 as the annual rate of unemployment jumps to the highest level in more than 10-years. The breakdown of the report showed 12 of the 24 categories increased, with sales at appliances stores increasing 3.2%, while spending in supermarkets and groceries, which accounts for a quarter of retail sales, tipped 0.2% from the previous three-month period. As households face tightening credit conditions paired with the ongoing deterioration in the labor market, the Reserve Bank of New Zealand is likely to support the real economy throughout the first-half of the year as policy makers aim to encourage a sustainable recovery. 05.12_TTN3

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.
00001_NZD 00002_NZD

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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