NZD/USD: Trading the New Zealand 1Q GDP Report

Trading the News: New Zealand GDP

What's Expected:

Time of release: 07/06/2011 22:45 GMT, 18:45 EST

Primary Pair Impact:NZDUSD

Expected: 0.3%

Previous: 0.2%

DailyFX Forecast: 0.0% to 0.6%

Why Is This Event Important:

New Zealand's 1Q GDP report is expected to show another 0.3% expansion in the growth rate, and the rise in GDP should spark a bullish reaction in the local currency as the recovery gathers pace. As the fundamental outlook improves, the Reserve Bank of New Zealand may reverse the 50bp rate hike in March, and Governor Alan Bollard may see scope to withdraw monetary stimulus later this year as the risk for a double-dip recession subside. However, as the marked appreciation in the New Zealand dollar dampens the outlook for future growth, the RBNZ may retain its wait-and-see approach throughout the remainder of the year, and the central bank head may talk down speculation for higher interest rates after the financial markets overreacted to the policy statement accompanied in the June rate decision.

Recent Economic Developments

The Upside

The Downside

The sharp rebound in business confidence paired with the ongoing recovery in the labor market should help to encourage private sector activity, and a faster pace of expansion is likely to prop up the New Zealand dollar as growth prospects improve. However, the slowdown in global trade paired with easing wage growth could have dampened the rebound in economic activity, and a dismal GDP may curb speculation for higher borrowing costs as the RBNZ continues to highlight the ongoing weakness within the real economy. In turn, a slower pace of growth could lead Governor Bollard to strike a balanced tone at the next policy meeting on July 27, and the pullback from 0.8326 may gather pace in the days ahead as interest rate expectations falter.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for a faster pace of economic growth certainly encourages a bullish outlook for the high-yielding currency, and the market reaction to the data could pave the way for a long New Zealand dollar trade as the fundamental outlook improves. Therefore, if GDP expands 0.3% or greater in the first-quarter, we will need to see a green, five-minute candle following the report to generate a buy entry on two-lots of NZD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to protect our winnings.

On the other hand, the slowdown in global trade paired with the ongoing weakness in the real economy may lead to a dismal GDP report, and the central bank may talk down interest rate expectations as the marked appreciation in the New Zealand dollar bears down on private sector activity. As a result, if the growth rate expands less than 0.3% or unexpectedly contracts from the first quarter, we will implement the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.

Impact the New Zealand GDP report has had over the NZD during the last quarter

4Q 2010 New Zealand GDP

Economic activity in New Zealand grew 0.2% in the fourth quarter after contracting 0.2% during the previous period, and the rebound in GDP may gather pace in 2011 as the central bank lowers the benchmark interest rate to help stimulate the ailing economy. As the region copes with the aftermath of the Christchurch earthquake, the Reserve Bank of New Zealand may keep borrowing costs at 2.50% throughout the remainder of the year, and Governor Alan Bollard may continue to preserve a dovish tone for future policy as the economic outlook remains clouded with uncertainties. However, as the region skirts a double-dip recession, the central bank expects the rebuilding efforts to spur growth in the second-half of the year, and the RBNZ may see scope to gradually normalize monetary later this year as heightening price pressures raise the risk for inflation. The slightly stronger-than-expected GDP report spurred a bullish reaction in the NZD/USD, with the exchange rate climbing back above 0.7400, and the rally gathered pace throughout the day as the pair close at 0.7485.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com