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Will A Contracting Economy Sink The New Zealand Dollar?

Thu, Jun 26 2008, 08:24 GMT
by Daily FX Research Team

DailyFX

Trading the News: New Zealand Gross Domestic Product

What’s Expected

Time of release: 06/26/2008 22:45 GMT, 18:45 EST

Primary Pair Impact : NZDUSD

Expected: 2.0%

Previous: 3.7%

How To Trade This Event Risk

Growth in New Zealand is expected to have slowed to 2.0% in the fourth quarter compared with 3.7% the quarter prior. The economy is anticipated to have contracted by 0.3% in the quarter, which would be the first time in more than two years. Indeed, manufacturing activity fell to 3.7% from 8.3% for the three months ending 2007. Additionally, the service sector has slipped into contraction after peaking in February. The country’s overnight interest rate stands at a record high of 8.25% which is dampening spending and weighing on the housing market, sending the island nation towards a recession. Indeed, consumer confidence fell in the second quarter to the lowest level since 1991, as rising food and gasoline prices erode their purchasing power. Despite inflation rising to 3.4% in the first quarter from 3.2% the quarter prior, RBNZ governor Bollard expects that slowing demand will curb the outlook for inflation and likely lead to the central bank cutting interest rates by the end of the year. A Bloomberg survey revealed that median estimate of thirteen economist predict the MPC to lower the benchmark rate in September, with two expecting a reduction as soon as the July meeting. A rate cut would sink the high yielding currency, especially with the hawkishness of the FOMC and other central banks

The sharp decline that is expected in the growth rate leaves significant potential for an upside surprise. Although, any decline in the economy will increase expectations of a rate cut, a better than expected result will allow the MPC more time to monitor upside inflation risks. Therefore, we will look for the economy to avoid contraction in the first quarter with the annualized rate remaining above 2.8%. Given the right fundamental mix, we will look for a five-minute, green bar as confirmation for a long trade in two lots of NZDUSD. An initial stop will immediately be placed at the swing low or reasonable distance and the target on our first lot will equal this risk. Our second objective will be based on discretion and to preserve profit, we will move the second lot’s breakeven when the first hits its target and is taken out.

Since, the quarterly number is expected to decrease 0.3% and the annualized rate to sharply fall to 2.0% from 3.7% the quarter prior, a inline print may be sufficient to bring out New Zealand dollar bears. We will look for contraction in the first quarter and the annualized rate to fall below 2%, confirming the economy is approaching a recession to signal a short NZD/USD trade. We will follow the same strategy and rules for a short trade that we have laid out for the long trade, just in reverse.

Published on  Thu, Jun 26 2008, 08:31 GMT