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NZD/USD: Trading the New Zealand 4Q GDP Report

NZD/USD: Trading the New Zealand 4Q GDP Report

2011-03-22 19:42:00
David Song, Currency Strategist
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Trading the News: New Zealand GDP

What’s Expected:

Time of release: 03/23/2011 21:45 GMT, 17:45 EST

Primary Pair Impact: NZDUSD

Expected: 0.1%

Previous: -0.2%

DailyFX Forecast: -0.2% to 0.0%

Why Is This Event Important:

Economic activity in New Zealand is projected to expand 0.1% during the last three-months of 2010 after unexpectedly contracting in the third-quarter, and the rebound in GDP could spur a bullish reaction in the NZD/USD as the central bank maintains a neutral tone for future policy. After lowering the benchmark interest rate to 2.50% earlier this month, Reserve Bank of New Zealand Governor Alan Bollard said GDP “held steady” in the fourth quarter, but went onto say that it was “quite possible” to see a contraction in the growth rate as the devastating earthquake in Christchurch disrupts the economic recovery. In turn, a dismal growth report could spur speculation for lower interest rates, and the central bank may look to support the real economy throughout 2011 in an effort to stem the risk for a double-dip recession.

Recent Economic Developments

The Upside

Release

Expected

Actual

Trade Balance (JAN)

-25M

11M

Business NZ PMI (JAN)

--

53.7

Private Wages ex Overtime (4Q)

0.5%

0.6%

The Downside

Release

Expected

Actual

Westpac NZ Consumer Confidence (1Q)

--

97.9

Retail Sales (DEC)

-0.4%

-1.1%

Employment Change (QoQ) (4Q)

0.2%

-0.5%

As businesses increased their rate of production, with private wage growth gathering pace, economic activity may have recovered in the fourth quarter as the region continues to benefit from the expansion in global trade. However, as household confidence slips to a two-year, the ongoing weakness within the private sector could produce an unexpected contraction in the growth rate, and a dismal GDP report is likely to bear down on the exchange rate as interest rate expectations falter. As growth and inflation remain subdued, the RBNZ may see scope to ease monetary policy further over the coming months, and speculation for another rate cut could lead the NZD/USD to pare the advance from the previous year as the central bank aims to shore up the economy.

Potential Price Targets For The Release

NZDUSD_Trading_the_New_Zealand_4Q_GDP_Report_body_ScreenShot008.png, NZD/USD: Trading the New Zealand 4Q GDP Report

How To Trade This Event Risk

Expectations for a rebound in GDP certainly reinforces a bullish outlook for the kiwi, and the market reaction following the report could set the stage for a long New Zealand dollar trade as the prospects for future growth improves. Therefore, if the growth rate expands 0.1% or greater in the fourth-quarter, we will need a green, five-minute candle subsequent to the release 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 from the entry, 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 economic shock from the devastating earthquake could lead to an unexpected contraction in 4Q GDP, and a dismal growth report is likely to spur speculation for another rate cut as the central bank aims to encourage a sustainable recovery. As a result, if economic activity holds flat or weakens from the previous period, we will implement the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse.

Impact the RBNZ Interest Rate Decision has had over the NZD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

3Q 2010

12/22/2010 21:45 GMT

0.1%

-0.2%

-10

+57

3Q 2010 New Zealand GDP

Economic activity in New Zealand unexpectedly weakened during the third-quarter, with GDP contracting 0.2% in the three-months through September, and the risk for a double-dip recession may materialize going into 2011 as the region copes with the worst earthquake in eight decades. The breakdown of the report showed construction weakened 2.5%, with farm and mining outputs slipping 5.5%, while manufacturing fell another 1.7% following the 4.3% contraction in the second quarter. As the natural disaster disrupts the recovery, the Reserve Bank of New Zealand may look to support real economy throughout the first-half of the following year, and the central bank may see scope to ease monetary policy over the coming months as it aims to balance the risks for the region. Indeed, the New Zealand dollar sold off following the dismal GDP report, with the NZDUSD slipping to a low of 0.7377, but the decline was short-lived as the pair ended the day at 0.7470.

NZDUSD_Trading_the_New_Zealand_4Q_GDP_Report_body_ScreenShot009.png, NZD/USD: Trading the New Zealand 4Q GDP Report

Questions? Comments? Join us in the DailyFX Forum

Join Quantitative Strategist David Rodriguez in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

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

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