NZD rose to 1 month highs this morning on the back of stronger Jun trade balance numbers. Exports came in at 4.02B NZD, slightly higher than the 4.01B expected, while imports hit 3.60B, a good 300M lesser than the expected 3.90B. The combination of both imports and exports improved overall trade balance to 414M vs the expected 105M, and a huge improvement from previous month’s 39M. YTD trade balance figures remain deeply negative, but nevertheless is an improvement from previous month’s 0.9B, currently standing at 0.78B.
Stronger trade balance = Stronger currency. Hence it is not surprising to see NZD/USD rallying slightly higher. The lack of strong bullish follow-through is probably due to the reliance on lower imports figure for the better than expected trade balance. Hence this series of numbers does not reflect an improving NZ economy, as the absolute export numbers actually declined from 60Million M/M, but just that New Zealanders are buying less foreign goods. Positive impact on NZD yes, but long-term bullish driver – not so much.
Hence it is no surprise that price retreated back below 0.80 mostly in the subsequent hours of trading during early Asian hours. Price eventually traded back down lower when HSBC released the Flash Manufacturing PMI numbers, which turned out to be the lowest in 11 months, suggesting that the economic slowdown in China may be worse than what market is expecting. Comparing to the iffy “improved” trade balance, this is a much clearer sign that New Zealand’s future economic outlook will be lower thanks to China. This pushed prices down towards 0.796 support quickly, with a technical rebound giving some respite to bulls.
The rebound at 0.796 is a good affirmation of the Channel Bottom, which opens the possibility for price to head towards 0.80 once more as the uptrend remains in play. Stochastic readings is currently in the midst of a bearish cycle, but is hinting to reverse higher, forming a trough in the process. The question right now is whether a bullish cycle signal from here will be reliable considering that reading has yet to hit Oversold. However, readings did manage to form a trough back on 20th July around current levels. Price has managed to tag Channel Bottom the previous time round this happened, hence there is a precedence for a strong bullish cycle to emerge from here.
Fundamentally, with RBNZ rate decision coming tomorrow morning (Wed 5:00pm EDT), we could find sellers lacking from now till the rate decision as RBNZ is not expected to slash rates this time round. This would also help Channel Bottom to rebuff any attempts to break it, but may be a double edged sword with regards to any 0.80 break attempt as bulls may also want to refrain from buying excessively with a huge event risk looming. As Governor Wheeler is expected to continue with his dovish dross and threats of rate cuts, there is a higher risk towards the upside as market may have already anticipated/priced in any bearish outcome.