The Markets Ahead of NZ Trade Balance

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This is quite a quiet week on the data front from New Zealand. However, there is one major event that could move the currency.

Exports are an important part of the economy. So, the trade balance has extra weight on the exchange rate.

Additionally, following the drop in bond yields, New Zealand isn’t as attractive as a carry trade destination. This makes cash demand from trade a larger factor in currency performance.

In the last two months, the trade balance has come in ahead of downward moves in the currency, as the export numbers have disappointed.

With the Chinese providing a more optimistic tone on the trade front the last couple of days, the markets have been more willing to take on risk. Could the upcoming data truncate the recent kiwi strength?

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What We Are Expecting

Expectations are for the September New Zealand trade balance to come in at a deficit of NZD1.11B. 

This would be an improvement over the NZD1.57B deficit from the prior month. It would also mean three consecutive months of deficits, and the third quarter had a negative trade balance. This would be expected to weigh on the GDP numbers which will be published in December.

On an annualized basis, we can expect the trade balance to remain pretty much the same, at -NZD5.50B compared to -NZD5.48B which was reported last time.

Despite the consecutive trade deficits in the last few months, the cumulative annual trade balance has been slowly improving.

New Zealand Not Affected by Trade Problem?

China is New Zealand’s largest trade partner, and given the knock-on effects of the ongoing trade conflict with the US, it would be expected that its exports would be affected.

However, last month, trade with China was the item that most increased among exports. A look at the export components shows why: (seasonal) fruit was the largest export item.

China’s consumer demand remains relatively healthy despite a slowing economy, and demand for consumer goods from New Zealand remains strong. In fact, exports continued to rise at the same (seasonally adjusted) pace since the beginning of the trade war.

The Domestic Situation

Although exports continue to grow, it doesn’t mean that New Zealand is immune to the general global slowdown.

Capital flows have been slightly negative for the last couple of quarters. Where the economy appears to be struggling more is on the domestic front. In the second quarter, a downturn in construction activity following a fall in housing prices since earlier in the year weighed on economic growth.

The last few months have seen an erosion in consumer confidence. Electronic card transactions have beat expectations, but have not shown growth.

The “positive” effect from consumer data has largely been because expectations were worse than reality. Business confidence has also suffered at the same time.

Going Forward

This could mean that while an improving trade balance ought to have an immediate effect on the currency, it doesn’t change the longer-term trajectory if the domestic economy is depressed despite rising exports.

A further cut by the RBNZ is already being penciled in. Unless there is a substantial turn around in economic confidence, it could be that the latest kiwi strength will be short-lived.

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