Record high borrowing costs paired with slowing demands from the global economy has fueled growth concerns for New Zealand, and the economy may fall into a technical recession as economist predict economic activity to contract 0.5% in the second quarter. In fact, unemployment surged higher to 3.9% from 3.7% in the first quarter, while retail spending excluding inflation slipped to a fresh record low of -1.5% in the second quarter. Meanwhile, international trade conditions have also deteriorated in recent months as the trade deficit pushed higher to -781.0M from -207.0M in June, and was followed by an increase in the current account deficit to -3.910B from -2.109B in the first quarter. Furthermore, the RBNZ has lowered the benchmark interest over the last two meetings, cutting 75bp to bring the benchmark interest rate down to 7.50% from 8.25%. Stalled growth paired with the slowdown in the global economy suggests that growth may remain subdued for the rest of the year as foreign and domestic demands continue to falter. Furthermore, overnight index swaps are showing that market participants have already raised bets that the RBNZ will cut the benchmark interest rate by nearly 125bp over the next 12 months. Increase expectations of further rate cuts suggests that traders expect economic conditions to worsen in the months ahead, which would only fuel bearish sentiment for the kiwi.

Two consecutive quarters of negative growth would institute a technical rescission for New Zealand, but a better than expected result may help to stave off downward pressures for the New Zealand dollar. As a result, if the New Zealand economy avoids a contraction in the second quarter, we will look for a green, five-minute candle to confirm a long trade for two lots of the NZD/USD. Our initial stop will be placed at the swing low (or reasonable distance) and our first target will be equal to this risk. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot when the first trade reaches it target.

However, as economic activity continues to falter, an contraction in GDP could trigger further selling pressures for the New Zealand dollar. Therefore, we will look for a red, five-minute candle following the release to confirm a short NZD/USD trade. We will follow the same strategy for the short position as we did for the long position mentioned above, just in reverse.

John Kicklighter a Currency Strategist at FXCM.