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. There is a saying that there are more sheep in New Zealand than people, and this says much about the importance of its 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 for the avocado to grow, and one of them is New Zealand. Its economy is in sharp contrast with the one of its big neighbor, Australia, but, I would say, they are completing each other well. If Australia offers commodities, New Zealand is a top dairy exporter.
What Data Matters for the New Zealand Economy?
The 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 NZDUSD. Among Forex traders, the New Zealand’s currency is known as the Kiwi dollar. That is because the fruit is another thing that is representative of its economy. The NZDUSD 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 is taking little margin and traders have the tendency to overtrade the account because there is plenty of margin left. This can backfire in a blink of an eye if there is a sharp opposite move in the wrong direction. For this, 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 is holding 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. Like any rate decision, most of the times it is priced in the market, so the next event in the line of importance is the RBNZ Statement and Press Conference. Volatility is extreme during these events.
The RBNZ Press Conference and Statement
The press conference and the statement are following 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 is following every OTHER interest rate decision, on 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.
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 period the press conference takes place: thirty minutes.
CPI – Inflation
Inflation is on the RBNZ mandate as well. A level below or close to two percent is targeted and deviations from this level are met with changes in the monetary policy.
GDP (Gross Domestic Product)
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 three 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 in the end of March 2017.
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 tentative, 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.
The release is important because it reflects the changes in the trade balance if a deficit or a surplus will follow. This will, in turn, affect the value of the currency. The perfect example comes from China. The Chinese are the main buyers of the dairy products made in New Zealand. Powder milk is the perfect example. If the powder milk’s prices are 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 seen in the budget, as it is will be affected, in the sense that revenues will miss and cuts from other sectors needs to be made. The final effect will be that the Kiwi dollar will suffer as well. All in all, while a tiny part of the world, the New Zealand’s economy, and its currency are an important part of the Forex dashboard. This article was meant to point out the important things to look for when trading its currency, the Kiwi dollar.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- Trading on a Demo Account
– Explaining why trading on a demo account before going on a live one is mandatory for any serious trader.
- Types of Forex Charts
– How many types of Forex charts exist, how to interpret them, advantages and disadvantages of each type, etc.
- Basics of Technical Analysis
– What is technical analysis, why it is important and why traders are using it. Advantages over fundamental analysis are highlighted as well.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- “Economic reform in New Zealand 1984-95: The pursuit of efficiency.” Evans, Lewis, Arthur Grimes, Bryce Wilkinson, and David Teece. Journal of Economic Literature 34, no. 4 (1996): 1856-1902.
- Corporatization and privatization: lessons from New Zealand. Duncan, I., & Bollard, A. (1992). Oxford University Press, USA.