By DailyFX – Domestic consumption is undoubtedly the New Zealand economy’s bread and butter. However, international trade is clearly a main artery in its own… … right.

Before New Zealanders began their long-lasting shopping spree,
exports of commodities and manufactured goods sustained growth. While
expansion has forged ahead with the help of domestic spending, trade has
clearly suffered in the background. For the month of April, economists
expect the balance to once again slip into a modest deficit after
reporting its first positive number in ten months. At the same time, the
preferred year-over-year number (favored over the monthly figure since
it is not seasonally adjusted) is projected to hit the wires with a
wider NZ$5.82 billion deficit. Both outlooks come to the same conclusion
that the 18 percent appreciation in the New Zealand currency over the
past year is crimping sales abroad and offering a cheaper alternative
for local shoppers in imports. Suffering exporters and rampant consumer
spending have long been an issue for the policy makers and were
addressed recently by Finance Minster Michael Cullen. In a recent
statement Cullen said he wants to see local spending habits cool so that
rates may be cut by next year allowing for relief for the local
currency. This was just one of many efforts made by officials to
verbally talk down the local currency. The reality of the situation
though is that international investors know RBNZ Governor Alan Bollard
has based the future of interest rates on strength in both domestic
spending and the housing market. Therefore, even if the trade deficit
ballooned to a new record, the central bank would be no closer to
cutting the record high overnight lending rate. On the other hand, as
local firms suffer from the high currency, the steady pass through to
consumers draws that eventual cut ever closer.

Bonds – 10-Year New Zealand Government Bond Futures

Despite RBNZ Governor Bollards decidedly neutral turn at the last
monetary policy meeting, yields have held their ground. Ultimately, the
warning that consumer spending and housing sector inflation are still
threats to price growth has led traders to believe the rate cut that so
many investors have worried about will not be realized until the data
paves the way. Waiting in the wings, the physical trade account for
April sets up the next pertinent indicator though the markets
reaction to the release can be very different depending on its
direction. Should the deficit expand as expected, it may have little
impact on yields since it would not provide the impetus for a rate cut.
Alternatively, an improvement would negate officials concerns over
interest rates and the currency; and could help rally yields to 6.265.

FX – NZDUSD

Since hitting resistance near the .7500 level in March, NZDUSD has been
steadily declining as it becomes increasingly unlikely that the Reserve
Bank of New Zealand will take interest rates any higher than their
current record of 7.75 percent. Now, the pair has come to a crossroads
as technical levels show price hesitating at support at .7255. However,
the release of the nations trade balance for the month of April could
determine the New Zealand dollars next move, as the figure is
anticipated to show a deficit of NZ$0.01 billion. Such a report will
likely reflect that consumption continues to propel imports while
exports suffer at the hands of a strong New Zealand dollar. This is
would give mixed signals to traders of the New Zealand dollar, as hot
consumer spending has been cited as a possible reason for the RBNZ to
consider raising rates again which is highly bullish for NZDUSD.
However, softer export growth bodes very ill for GDP, leaving the
central bank little room to tighten policy further. Given the amount of
underlying support below, NZDUSD could be in for a bounce above .7300,
but given nature of this recent downtrend along with softer outlooks for
the New Zealand economy, the pair could fall below .7255 shortly after.

Equities – NZX 50 Index

New Zealand share prices closed little changed after hitting a record
high of 4,319.54 earlier in the session, with the NZX-50 index down 0.1
percent to 4,289.59. Top stock Telecom eased back NZ$0.03 to NZ$4.79,
while profit taking pushed Fletcher Building down NZ$0.20 to NZ$12.65.
Meanwhile, SkyCity closed up NZ$0.16 at NZ$5.08 after announcing
cost-cutting plans and possible asset sales. Trade in New Zealand
equities could become quite volatile tomorrow, however, with the trade
balance anticipated to show a deficit of NZ$0.01 billion as consumption
continues to propel imports while exports suffer at the hands of a
strong New Zealand dollar. This is overtly negative for the NZX 50 index
for two reasons: 1) resilient consumption growth will only lead the
Reserve Bank of New Zealand to maintain their tightening bias and 2)
softer export growth bodes very ill for major companies listed in the
New Zealands benchmark index, such as Fisher & Paykel. Furthermore,
given the rapid retracement of the NZX 50 index during trading
yesterday, technical factors signal that equities could be in for a
decline towards a supporting trendline near 4,250.00.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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