Fundamental Analysis – Explaining the New Zealand Economic Data

The New Zealand economy is a relatively small one, but it is important in the overall global economy. It has some specific characteristics, and the role of its central bank is highly regarded in the world. New Zealand’s economy is based on everything related to sheep: milk, milk products (dairy products), wool, sheep meat, etc. It is said that there are more sheep in New Zealand than people, and this says much about the importance of that industry. Another important product in New Zealand is, to the surprise of many, the avocado. As a side note, in 2016 the avocado was one of the few products that saw an exponential growth in prices. The reason for that comes from the fact that the world is leaning toward healthier food alternatives, and the avocado is well known for these characteristics. There are only a few regions in the world where the climate allows the avocado to grow, and one of them is New Zealand. Its economy is in sharp contrast to that of its big neighbour, Australia, but I would say that they complement each other well. If Australia offers commodities, New Zealand is a top dairy exporter.

What Data Matters for the New Zealand Economy?

New Zealand’s currency is the dollar, or the New Zealand dollar. It is a liquid currency, and the most representative currency pair is the NZD/USD. Among Forex traders, New Zealand’s currency is known as the Kiwi dollar, actually after the bird of that name, although the kiwifruit is another of its major exports. The NZD/USD pair is liquid and volatile, and popular among Forex traders. However, it is one of the trickiest currency pairs to be traded. This is because it requires little margin when opening a trade. When compared with other currency pairs, this one takes little margin, and traders have the tendency to overtrade the account because there is plenty of margin left. This can backfire in the blink of an eye if there is a sharp opposite move in the wrong direction. For this reason, caution is needed when trading the Kiwi dollar.

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The Official Cash Rate

The Official Cash Rate is the interest rate set by the central bank, the Reserve Bank of New Zealand (RBNZ). RBNZ holds meetings eight times per year, like its main counterparts around the world, and the interest rate shows the level at which commercial banks lend balances held at the RBNZ to other banks overnight. As with any rate decision, most of the time it is priced in the market, so the next events in the line of importance are the RBNZ Statement and Press Conference. Volatility is extreme during these events.
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The RBNZ Press Conference and Statement

The press conference and the statement follow the interest rate decision, and there is an hour between the two. This interval is needed for market participants to assess the new conditions and to properly prepare for the press conference. It is important to note here that a press conference follows every other interest rate decision, in the footprints of the Federal Reserve of the United States. This is in contrast with the ECB or the RBA, where a press conference follows every interest rate decision.
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The press conference has two parts: In the first part the statement is read, and the second part is open to press questions. Heavy market volatility is expected for the 30-minute period during which the press conference takes place.

CPI – Inflation

Inflation is on the RBNZ mandate as well. A level below or close to 2% is targeted, and deviations from this level are met with changes in the monetary policy.

 Gross Domestic Product (GDP)

The GDP shows the total value of goods and services an economy produces. As a rule of thumb, the bigger the better for the economy and for the currency. In the New Zealand, the inflation-adjusted value of all goods and services is considered. This is a more realistic approach, and provides a clear picture of the economy. The GDP is released quarterly, almost 3 months after the quarter ends. So, for the GDP that reflects the last quarter of 2016, look for the release to hit the wires somewhere at the end of March 2017.
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GDT Price Index

Besides the central bank’s meetings and monetary policy statement, the GDT Price Index is by far the most important piece of data that influences the Kiwi dollar. It stands for the change in the average price of dairy products sold at auction. Because the New Zealand economy is heavily dependent on dairy prices, these changes in prices must be known when trading a NZD pair. The release is made public twice a month, and the exact hour of the release is variable, depending on how the auction goes. As usual, there is always a forecast. If the actual is bigger than the forecast, the Kiwi dollar will be bought. If not, the initial reaction will be bearish.
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The release is important because it reflects the changes in the trade balance if a deficit or a surplus follows. This will, in turn, affect the value of the currency. The perfect example comes from China. The Chinese are the main buyers of dairy products produced in New Zealand. Powdered milk is the perfect example. If the price of powdered milk is tumbling, for whatever the reason, it means that the revenues from the quantity sold to the Chinese counterpart will be less than anticipated. This, in turn, will be reflected in the budget, as it will be affected in the sense that revenues will miss, and so cuts from other sectors will need to be made. The final effect will be that the Kiwi dollar will suffer as well. All in all, while only a tiny part of the world, New Zealand’s economy and its currency are an important part of the Forex dashboard. This article has pointed out the important things to look for when trading its currency, the Kiwi dollar.

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