On Wednesday evening, just after US close, Statistics New Zealand will report the nation’s latest trade balance data. The report comes off the back of considerable strength in the NZDUSD, fueled by the interest rate hike earlier on in the month. Better than expected data could compound the bullish bias in the pair and carve out highs not seen since 2011, but this scenario is from a certainty; here’s why.
To start with, let’s take a look at the interest rate hike. The RBNZ boosted rates from 2.50% to 2.75%. The accompanying statement hinted at a sustained policy of hikes throughout the year, saying, “In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today.”
The word commencing makes the NZD hot property. In effect, the RBNZ has beaten the Fed to the punch, and in doing so, offered up a medium term bullish bias in the pair.
However, Wednesday’s trade balance data could draw attention to a potential tripping point in the aggressive tightening policy – China. A recent spate of Chinese data has highlighted the potential a Chinese economic slowdown, a scenario that could have long-term repercussions for New Zealand.
The NZ government has taken steps towards reducing the nations dependency on China, with the latest being a potential free trade deal with the EU, but two way trade between the economies continues to swell. Targets set by NZ Prime Minister John Key and China’s President Xi Jinping suggest two way trade at $30B by 2020, versus just $18B last year. With these figures in mind, it is easy to see how combination of higher interest rates, increased dependence and a dip in import demand from China could override the short to medium term bullish sentiment in the NZDUSD.
This is a long-term situation however, and the market will likely overlook the overarching fundamentals as we head into the release. Consensus suggests a trade surplus of 600M, almost double the previous release at 306M. A better than expected release would validate a retest of 0.8630 resistance, and could catalyze fresh NZDUSD highs. Such a situation would put 2011 highs just shy of 0.8839 on the radar as a potential upside target.
Conversely, a downside miss might draw attention to the above scenario, and could potentially reverse sentiment. In this situation, look to in-term resistance at 0.8513 as an initial target. A close below this level would hint at further downside, with a secondary target at 0.8469 and, beyond that, January resistance at 0.8390.
Written by Samuel Rae – Chief Currency Strategist at Capital Trust Markets
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