NZD/USD – Unfazed by worsening Trade Balance

New Zealand latest Trade Balance data worsened, with Exports falling from 4.10B to 3.35B, amidst expectations of 3.60B. Imports grew to 3.65B, even higher than Dec’s 3.57B which has also been retrospectively revised higher. Economists estimating a 3.50B import were taken by surprised, resulting in Trade Balance declining 400 million more than expected. Falling exports is bearish NZD as New Zealand’s GDP mostly come from exports. A fall in exports will severely threaten Kiwi’s economy, which may prompt RBNZ to lower NZD artificially to make exports competitive again. RBNZ’s Wheeler has stated that they stand ready to lower NZD using rate cuts “if necessary”, and some traders believed in this notion shorted NZD/USD, pushing price to a low of 0.823, which was the current Asian session low. This group of traders has been proven to be in the minority, as price quickly bounced back, trading sideways around the levels before the drop.

Hourly Chart

The short selling off of NZD/USD did not manage to test the 61.8% Fib retracement line (see Daily Chart below) and more importantly failed to test even the previous swing low just before Bernanke’s speech. The price rebound could also be attributed back to overall optimism during Asian market hours which saw N225, HSI, ASX and even NZX 50 posting decent gains. However, this does not mean overall bearishness of NZD/USD has faded. Price action has been limited by the descending Channel, and though Stochastic reading is above 20.0 after breaching the Oversold level earlier – a bullish sign – Readings are threatening to move lower with Stoch/Signal line closing into each other. It seems Wheeler’s comments may still act as a monkey on traders back, though the exact scenario which is deemed “necessary” for intervention is currently still unclear.

Daily Chart

From the Daily Chart, price is looking to be more bearish with the breaking of the rising trendline. 61.8% Fib is currently holding, and should it be respected, bullish momentum may resume as price would be able to maintain a Higher High, High Low sequence which has been in place since July 2012. Stochastic reading is heading towards Oversold regions, though momentum in the readings does not suggest that a trough may be in place within the next 1-2 candles.

Fundamentally, RBNZ may not be as dovish as we think, despite what Wheeler has said. Latest RBNZ currency flow data shows that RBNZ has bought net NZD 3 million in Jan 2013 which is most likely in respond to better than expected economic data during the month. Does falling Trade Balance constitute bad data? It seems that the Kiwi Government were already prepared for that eventuality, with Prime Minister Keys saying that import prices are lower, which is good for consumers. As such, it is highly unlikely that Governor Wheeler will be too concern with this figure. Why did Wheeler say what he said then? Well, speculators may simply point to the fact that Central Bankers may be forced to reiterate their resolves and strength in the face of looming currency wars even though they may not wish to engage actively – very similar to US and USSR’s showing of military strengths during the height of the Cold War.

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