Trading the Forex News: How Will New Zealand Retail Sales Affect the Kiwi?

10/10/2008 12:57 pm EST

Focus: FOREX

Retail spending in New Zealand has certainly weakened throughout the first half of the year, and conditions may only get worse as the economy slipped into a recession for the first time since 1998.

What Is Expected

Time of release: 10/12/2008 21:45 GMT, 17:45 EST
Primary Pair Impact: NZD/USD
Previous: -0.8%

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How to Trade this Event Risk  

Retail spending in New Zealand has certainly weakened throughout the first half of the year, and conditions may only get worse as the economy slipped into a recession for the first time since 1998. The downturn in the housing sector has certainly taken a toll on the economy, as property values slipped 6.1% from the previous year, and were followed by a 24% decline in home sales. Furthermore, building approvals fell 7.9% in July, which was the lowest reading since 1986, and suggests that the housing demands may weaken further as employment demands falter. In the second quarter, the jobless rate unexpectedly surged to a two-year high of 3.9%, indicating that businesses have cut back on recruitment as the global economy slows down. Growth prospects have clearly deteriorated for the $105B economy, which led the Reserve Bank of New Zealand to cut the benchmark interest rate by a total of 75bp over the last two policy meetings. In fact, RBNZ governor Alan Bollard expects the economy to contract another 0.3% in the third quarter, leaving the door wide open for further rate cuts. Nevertheless, as interest expectations weaken in the midst of stalled growth, disappointing sales data could fuel a bearish outlook for the New Zealand dollar.  

Setting up a trade based on the given event risk may not be as clear cut as some of our other trades, but an unexpected improvement in the retail sector could trigger bullish sentiment in the New Zealand dollar. In fact, consumer confidence snapped back from a 17-year low as the index increased to 104.8 from 81.7 in the second quarter, which suggests that lower borrowing costs paired with falling oil prices have helped to improve consumers’ outlook. Therefore, a rise in private sector consumption would favor a bullish outlook for the kiwi, and we will look for a green, five-minute candle following the release to trigger a long trade for two lots of the NZD/USD. We will setup 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 purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to break even when the first trade reaches its target.  

On the other hand, the central bank has signaled that they are clearly switching their focus to growth, and may look to lower the benchmark interest rate further as growth prospects falter. Therefore, a drop in sales would generate a short position for the pair, and we will follow the same strategy as the long position mentioned above, but just in reverse.

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By David Song, Chief Strategist, DailyFX

DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn forex trading with a free practice account and charts from FXCM.

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