NZ Trade Balance (SEP) (21:45 GMT; 17:45 ET)
Expected: -700.0M
Previous: -945.0M

NZ Imports (SEP) (21:45 GMT; 17:45 ET)
Expected: 3.50B
Previous: 3.60B

How Will The Markets React?

While the Reserve Bank of New Zealand left rates steady on October 24th at a record high of 8.25 percent, as expected, the accompanying policy statement issued by RBNZ Governor Alan Bollard remained slightly hawkish. Indeed, Bollard noted that the "labor market remains tight, domestic income growth continues to expand on the back of strong commodity prices, and core inflationary pressures persist." While Bollard also noted that there were signs that "the housing market is moderating," multiple upside inflation risks suggest that a rate cut is not in the cards in the near-term as conditions remain fairly resilient. The release of upcoming trade balance figures may only exacerbate this sentiment as the deficit is anticipated to narrow to NZ$700 million. However, a breakdown of the data will likely show that the RBNZ’s aggressive policy tightening earlier in the year has started to make an impact, as imports are estimated to edge back to NZ$3.5 billion from NZ$3.6 billion, suggesting that demand for consumption goods is declining. Meanwhile, exports are forecasted to rise to NZ$2.78 billion from NZ$2.66 billion, as a drop in the New Zealand dollar from July’s 17 year highs made goods from the country more attractive. When it comes to the market’s reaction, forex traders will likely focus on the import figure given its implications for RBNZ policy and interest rates while equity traders will pay heed to export growth as a gauge for health in the business sector.

FX – NZD/USD

The combination of a return to carry trade buying along with rallies in commodities has helped push NZD/USD towards trendline resistance at 0.7747. On an intraday basis, the move above the 61.8 percent fib of 0.7785 – 0.7364 at 0.7623 was important and signals that the pair may still have some steam left. However, the release of trade balance data out of New Zealand has the potential to shake NZD/USD up quite a bit, especially if the data deviates substantially from expectations. If the deficit widens on the back of stronger imports, traders may start to speculate that the RBNZ will consider raising rates to yet another record high of 8.50 percent and push NZD/USD to test 0.7747. However, if the deficit narrows with the help of softer import growth – suggesting that consumption in New Zealand has fallen back – Kiwi could drop below 0.7600 as investors will judge that the RBNZ’s ultra aggressive monetary policy tightening scheme earlier in the year has put a dent in household spending and other inflation pressures.

Equities – NZX 50 Index

The NZX 50 Index recently backed off from record highs looming just above 4,330, though declines have found support near the 4,229 level. If commodity prices continue to mount, traders remain risk seeking, and upcoming NZ trade data shows the deficit narrowing, the NZX 50 will likely take on the highs once again. However, if the release of NZ trade data shows that exports continue to suffer, the index could break down to target the 4,165.

Terri Belkas is a Currency Strategist at FXCM.