NZD/USD Steady Despite NZ Terms of Trade Falling Most in 7 Years

Talking Points:

• New Zealand Dollar little changed as NZ Terms of Trade data is released
• The index fell 8.4 percent from the 2Q which is the largest decline in 7 years
• Dairy-based volume exports rise 11 percent, RBNZ rate decision next week

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The New Zealand Dollar showed a tepid response after New Zealand’s Terms of Trade figures crossed the wires. The index missed the -2.6 percent estimate, registering at -3.7 percent in the third quarter of 2015. This marked the largest quarter-to-quarter deterioration since 2008. The print itself marked a one-year low.

In more detail, the 3.7 percent decline was caused by import prices surpassing that of exports. Import prices gained 7.3 percent. This was led by a 13 percent rise in fuel. Export prices rose only 3.4 percent. This was led by increases in beef, lamb, and dairy volumes coming in at 12.0, 8.5, and 11.0 percent respectively.

The Index can be an important measure for the Reserve Bank of New Zealand because the island-nation is an export-driven economy with dairy being its top commodity export. In its most recent Financial Stability Report, the central bank stated that there are risks from dairy prices. Even though the index yielded negative, perhaps the 11 percent volume surge in dairy-based exports helped offset the negative implicationof the report for RBNZ policy bets.

Next week the RBNZ will have its December interest rate decision. The central bank currently has a data-dependent economic outlook for policy direction. The markets are pricing in a 48 percent probability of a rate cut at its next meeting, and at least one rate cut over the next year.