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The New Zealand dollar is likely to face increased selling pressures over the next 24 hours of trading as economists forecast the GDP report to show a 1.1% contraction in the fourth quarter, which would be the biggest drop in growth since the first quarter of 1991.
Trading the News: New Zealand Gross Domestic Product
Time of release: 03/26/2008 21:45 GMT, 17:45 EST
Primary Pair Impact : NZDUSD
Impact the broad New Zealand growth report had on NZDUSD over the last 2 quarters
3Q 2008 New Zealand Gross Domestic Product
The third quarter GBP report for New Zealand showed that the annual rate of growth contracted another 0.4% after falling 0.2% in the previous quarter, and conditions are likely to get worse as the economy faces its first recession in a decade. As a result, RBNZ Governor Alan Bollard is widely expected to lower the official cash rate by 50bp to a record-low of 4.50% next month in an effort to stimulate the ailing economy, and may continue to ease policy further over the medium-term as trade conditions falter. Despite the weakening outlook for growth and inflation, Governor Bollard said that he expects the economy to recover in the second half of 2009 as a result of the extraordinary efforts taken on by the central bank however, as households and business face a deepening economic downturn, policy makers could be forced to step up their efforts as they attempt to steer the economy out of the recession.
2Q 2008 New Zealand Gross Domestic Product
Despite signaling a technical recession, the 2Q GDP reading of -0.2% was better than the -0.5% that was expected. The New Zealand economy continues to be impacted by freefalling commodity prices and the global slowdown. Although the growth numbers surprised to the upside they did little to change expectations that the RBNZ would lower rates again in October. Indeed, consumer confidence fell to a 17 year low in the second quarter as soaring food and energy prices sapped purchasing power and the economic outlook dimmed. Therefore, expectations that domestic growth would weakened has raised expectations that the central bank would need to cut rates further. Yet, the better than expected growth number was enough to spark bullish price action and lead to at least 25 points in profit.
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:
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.
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.
How To Trade This Event Risk
The New Zealand dollar is likely to face increased selling pressures over the next 24 hours of trading as economists forecast the GDP report to show a 1.1% contraction in the fourth quarter, which would be the biggest drop in growth since the first quarter of 1991. Fading demands from home and abroad has certainly dragged on the region throughout the second half of 2008, and as the $128B economy faces its worst recession in over a quarter century, the outlook for growth and inflation remains bleak. Private-sector spending, which accounts for more than half of the economy, slipped another 0.6% after falling 0.9% in the third quarter to mark the fourth consecutive quarterly decline in 2008, which is the worst slump since recordkeeping began in 1995, and as a result, manufacturing activity held flat in the same period, while business confidence dropped to -41.2 from -35.0 in January to reach the second-worst reading on record. Moreover, a report by Statistics New Zealand showed that the jobless rate surged to a five-year high of 4.6% from 4.2% in the third quarter, while private-wages in the region grew at a slower pace in the fourth quarter, and the data continues to reinforce a dour outlook for the isle-nation as households face fading demands for employment. Accordingly, the Reserve Bank of New Zealand lowered the benchmark interest rate by 50bp to a record-low of 3.00% earlier this month in an effort to jump-start the ailing economy, and may continue to ease policy further in the month ahead as economists forecast a global recession for this year. Nevertheless, comments by Governor Alan Bollard suggests that the central bank is nearing the end of its easing cycle as he sees the interest rate at a ‘very stimulatory' level, and continued to reinforce expectations for an economic recovery in the second-half as he projects the economy to start growing in the third quarter. Despite the positive outlook held by the central bank head, trade conditions continue to falter, while credit markets remain under pressure, and the data foreshadows a deepening recession in the region as households and businesses turn increasingly pessimistic towards the economy. Meanwhile, a Bloomberg News survey shows that economists expect the RBNZ to lower the cash rate by another 25-50bp at the next board meeting in April, and expectations for lower borrowing could weigh on the exchange rate going forward however, the New Zealand dollar may continue to advance against its currency counterparts over the near-term as investors raise their appetite for higher-yielding assets.
Expectations for a 1.1% drop in the growth rate clearly favors a bearish outlook for the New Zealand dollar however, an enhanced GDP reading would certainly set the state for a bullish kiwi trade as investors boost their willingness to hold higher-yielding currencies. Therefore, if the growth rate falls 0.5% or less in the fourth quarter, we will look for a green, five-minute candle following the release to validate a buy entry on two-lots of NZDUSD. Once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
Conversely, as private-sector spending falters while trade conditions deteriorate, fears of a deepening recession are likely to weigh on the outlook for future growth, and a dismal GDP reading would certainly lead us to short the New Zealand dollar as the economy faces its worst economic downturn in over 30 years. As a result, an in-line print or a drop of more than 1.1% in the growth rate would lead us to sell the kiwi-dollar, and we will follow the same strategy for a short NZDUSD trade as the long position mentioned above, just in reverse.