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NZD/USD: Trading the New Zealand Consumer Price Report

NZD/USD: Trading the New Zealand Consumer Price Report

2010-07-14 19:21:00
David Song, Currency Strategist
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Trading the News: New Zealand Consumer Prices

Why Is This Event Important:


However, as the global recovery gathers pace, the Reserve Bank of New Zealand may normalize monetary policy further in the second-half of the year, and a stronger-than-forecast reading for inflation could spur a rise in interest rate expectations as Governor Alan Bollard lifts borrowing costs off the record-low.

What’s Expected:
Time of release:        07/15/2010 22:45 GMT, 18:45 EST
Primary Pair Impact :    NZDUSD
Expected:         1.9%
Previous:         2.0%

Will This Be Market Moving (Scenarios):


Consumer prices in New Zealand are projected to expand at an annualized pace of 1.9% in the second-quarter after increasing 2.0% during the first three-months of 2010, and the drop in the headline reading for inflation could weigh on the exchange rate as the RBNZ anticipates inflation to “track within the target range even as the economy expands further.” At the same time, the central bank noted price pressures “are expected to increase” and sees inflation peaking at 5.3% in the year ending June 30, 2011, and an unexpected rise in price growth would lead certainly give Governor Bollard scope to deliver another rate hike later this month as the outlook for growth and inflation improves.

The Upside


The rebound in economic activity paired with rise in global trade could lead to an upward tick in inflation, and a faster pace of price growth could drive the New Zealand dollar to retrace the decline from the May high (0.7322) as investors speculate the RBNZ to raise the cash rate further over the coming months. Accordingly, the central bank may turn increasingly hawkish over the coming months and look to pick up its pace of tightening going into the fourth-quarter as policy makers expect the recovery to gather pace.

The Downside


However, as the RBNZ expects “the removal of stimulus to have quite a powerful and rapid impact on the economy,” a pullback in price growth could lead the central bank to adopt a neutral policy stance going forward, and weaker-than-expected reading for inflation is likely to weigh on the exchange rate as investors scale back expectations for a rate hike. As a result, if the anticipated rise in price growth fails to take place, the New Zealand dollar is likely to pare the advance from earlier this week, which could drive the exchange rate back below the 200-Day SMA at 0.7116.

How To Trade This Event Risk


Trading the given event risk favors a bearish outlook for the high-yielding currency as price growth wanes but nevertheless, an enhanced reading for inflation could set the stage for a long New Zealand dollar trade as investors speculate the RBNZ to normalize policy further. Therefore, if the headline reading for inflation holds steady or unexpectedly expands faster than 2.0%, we will need a green, five-minute candle following the release to establish 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, 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 reaches its mark in an effort to lock-in our profits.

In contrast, the slack within the real economy paired with the withdrawal of monetary and fiscal stimulus could hamper the rise in price growth, and a pullback in inflation could lead to a bearish reaction in the high-yielding currency as investors scale back expectations for a rate hike. As a result, if consumer prices rise at an annual pace of 1.9% or lower, we will favor a bearish outlook for the New Zealand, and we will implement the same setup for a short kiwi-dollar trade as the long position laid out above, just in reverse.

TTN 10-07-14_1

Impact New Zealand Consumer Prices has had over the NZD during the past month

TTN 10-07-14_3

1Q 2010 New Zealand Consumer Price Index

Consumer prices in New Zealand increased 0.4% in the first quarter, which missed forecasts for a 0.6% rise, while the annualized rate unexpectedly held steady at 2.0% amid projects for a 2.3% expansion. The breakdown of the report showed food prices increased 0.1%, with the cost of gasoline advancing 6.9%, while prices excluding fuel held flat during the first three-months of the year. As price pressures remain subdued, the Reserve Bank of New Zealand may hold a loose policy stance throughout the first-half of the year and support the real economy as it struggles to brush off the recession, but Governor Alan Bollard may see scope to normalize policy in the latter half of 2010 as the rebound in global growth gathers pace. At the same time, the central bank head expects inflation to reach 2.8% by the end of 2011, and the RBNZ may see scope to normalize policy over the coming months as it aims to balance the risks for growth and inflation. TTN 10-07-14_2

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

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

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