FX - NZD/USD: Trading the Change in New Zealand Employment

Trading the News: New Zealand Employment Change

Why Is This Event Important:

As market participants expect to see an expansion in New Zealand’s labor market, the rise in employment could lead the high-yielding currency to extend the advance from earlier this week as the outlook for growth and inflation improves. In turn, the Reserve Bank of New Zealand may drop its dovish outlook for future policy and see scope to tighten monetary policy further this year as the economic recovery gathers pace.

What’s Expected:

Time of release: 02/02/2011 21:45 GMT, 16:45 EST

Primary Pair Impact : NZDUSD

Expected: 0.2%

Previous: 1.0%

DailyFX Forecast: 0.0% to 0.2%

Will This Be Market Moving (Scenarios):

Employment in New Zealand is forecasted to increase 0.2% in the fourth quarter following the 1.0% expansion during the three-months through September, while the jobless rate is projected to increase to 6.5% from 6.4% during the same period as discouraged workers return to the labor force. As the NZD/USD pares the decline from January, a bullish reaction to employment report could lead the New Zealand dollar to recoup the losses from back in November, but the recent rally in the kiwi-dollar may taper off if we see the data fail to meet or exceed market expectations.

The Upside

As firms in New Zealand increase their rate of production throughout the last three-months of 2010, the rise in business confidence certainly reinforces an improved outlook for the labor market as private sector activity accelerates. A rise in employment could lead the NZD/USD to pare the decline from back in November, and the exchange rate may work its way back above 0.7900 as the near-term rally in the New Zealand dollar gathers pace.

The Downside

However, as economic activity unexpectedly contracts in the third-quarter, with the marked appreciation in the exchange rate dampening the outlook for global trade, businesses may keep a lid on employment as the region copes with the worst earthquake in 40 years. A dismal employment report could spark a sharp selloff in the New Zealand dollar and lead the NZD/USD to retrace the advance from earlier this week as the economic outlook remains clouded with uncertainties.

How To Trade This Event Risk

Expectations for a rise in employment certainly reinforces a bullish outlook for the New Zealand dollar, and market reaction following the release could set the stage for a long kiwi trade as the prospects for future growth improves. Therefore, if employment increases 0.2% or greater in the fourth quarter, we will need to see a green, five-minute candle following the data to generate a buy entry on two-lots of NZD/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our winnings.

In contrast, businesses in New Zealand may curb their temperament to expand their labor force as the region copes with the earthquake, and firms may scale back on production and employment over the coming months as the central bank retains a cautious outlook for the region. As a result, if employment holds flat or unexpectedly contracts from the third quarter, we will implement the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse.

Potential Price Targets For The Release

Impact the change in New Zealand Employment has had over the NZD during the last quarter

3Q New Zealand Employment Change

Employment in New Zealand jumped 1.0% in the third quarter amid forecasts for a 0.5% expansion, while the jobless rate fell back to 6.4% versus projections for a 6.7% print. As economic recovery gathers pace, we should see the labor market improve further over the coming months, and the economic developments may encourage the Reserve Bank of New Zealand to tighten monetary policy further over the coming months as the outlook for growth and inflation improves. Indeed, we saw the NZD/USD surge higher following the release, with the exchange extending the advance from earlier this month, and speculation for another round of monetary tightening may push the exchange rate higher as investors weigh the prospects for future policy.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com