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NZD/USD Risks Further Losses on New Zealand’s Widening Trade Deficit

NZD/USD Risks Further Losses on New Zealand’s Widening Trade Deficit

David Song, Shuyang Ren,

- New Zealand Trade Deficit of NZD1.125B Would Mark Largest Shortfall Since August 2013.

- Exports to Slow to NZD 3.20B- Lowest Since September 2010.

Trading the News: New Zealand Trade Balance

A marked expansion in New Zealand’s trade deficit may spark fresh monthly lows in the NZD/USD as it dampens the outlook for growth and inflation.

What’s Expected:

NZD/USD Trade Balance

Click Here for the DailyFX Calendar

Why Is This Event Important:

The weakening outlook for global trade may drag on interest rate expectations as the Reserve Bank of New Zealand (RBNZ) adopts a neutral tone for monetary policy, and Governor Graeme Wheeler may keep the cash rate on hold throughout the remainder of the year in an effort to combat the downside risk surrounding the real economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Manufacturing Activity s.a. (QoQ) (2Q)

--

-1.9%

ANZ Business Confidence (AUG)

--

36.6

Employment Change (QoQ) (2Q)

0.7%

0.4%

The trade report may highlight a weakening outlook for growth as business confidence deteriorates, and a marked expansion in the trade deficit may keep the RBNZ on the sidelines as the central bank continues to weigh the impact of the rate hikes from earlier this year.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product s.a. (QoQ) (2Q)

0.6%

0.7%

ANZ Commodity Price (AUG)

--

-3.3%

Terms of Trade Index (QoQ) (2Q)

-3.5%

0.3%

However, the improved terms of trade along withexpectations for a faster recovery may generate a better-than-expected print, and we may see central bank Governor Wheeler show a greater willingness to further normalize monetary policy should the data dampen the downside risks surrounding the New Zealand economy.

How To Trade This Event Risk(Video)

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Bearish NZD Trade: Deficit Widens to NZD1.125B or Greater

  • Need red, five-minute candle following the release to consider a short NZD/USD trade
  • If market reaction favors a long dollar trade, short NZD/USD with two separate position
  • Place stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish NZD Trade: Trade Balance Tops Market Expectations

  • Need green, five-minute candle to favor a long NZD/USD trade
  • Implement same setup as the bullish dollar trade, just in opposite direction

Potential Price Targets For The Release

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • May see the bearish trend continue to take shape should RSI dip back into oversold territory
  • Interim Resistance: 0.8370 (38.2% expansion) to 0.8390 (38.2% retracement)
  • Interim Support: 07970 (50.0% retracement) to 0.8000 pivot

Read More:

Price & Time: Minor USD Reprieve Or Something More?

GBP/USD Faces Growing Risk for Bullish Breakout as DailyFX SSI Flips

Impact that New Zealand Trade Balance has had on NZD/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

July 2014

08/25/2014 22:45 GMT

-475M

-692M

-10

+14

July 2014 New Zealand Trade Balance

NZD/USD Chart

New Zealand’s trade balance showed a $692 million deficit in July after posting a $242 million surplus the month prior, with the region marking the first trade deficit in 11 months on the back of falling prices for dairy and forest product exports. The weakening outlook for global trade may continue to dampen the appeal of the New Zealand dollar as it limits the Reserve Bank of New Zealand’s (RBNZ) scope to normalize monetary policy at a more aggressive pace. Nevertheless, the impact of the disappointing print was limited and short-lived as the New Zealand dollar regained its strength following the Asian trade, with the NZDUSD closing the day at 0.8340.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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