We’ve had an adjustment in the RBNZ’s outlook to reflect the less than satisfying data we have been seeing lately. But is one of the more important economic indicators for the currency going to reflect that?
Or are we going to have a better result? What can we expect from the trade balance, and how does it translate into currency moves?
Expectations and Schedule
The trade balance for March is coming out on Friday at 00:45 CET (which would be Thursday at 18:45 EST). The annualized version will also be published. The markets are likely to scrutinize the individual components of the balance just as much as the headline.
The consensus among surveyed economists is that the trade balance slipped into deficit, by just NZD271M. This would have reversed last month’s minuscule surplus of NZD12M. And it would lead the annualized trade deficit to plunge further into multi-year lows, coming in at -NZD6.6B, compared to the -NZD6.2B in February.
The Markets and Currency
Trade is the second largest driver of forex prices. So, if we have a significantly disappointing trade balance, that could add substantial weakness to the NZD and vice versa.
But often, just as important is why the trade balance is trending in a certain direction and what that implies for the future of demand for the currency.
New Zealand has traditionally had an economy that was largely dependent on exports. But that has been changing in recent years, with a focus moving towards tourism.
On that front, we’ve had good news this year. The larger summer tourist season is closing out with a record number of tourist arrivals. However, with tourism winding down, the demand for the currency from visitors will also do so, putting some downward pressure on the exchange rate.
The Components that Drive Sentiment
Last month was exemplary of New Zealand trade development, where exports jumped 8.3% over the prior year. This is something that would make most countries quite happy.
On the other hand, imports advanced by 12.9%, which is what erased most of the gains from the growth of exports in the trade balance. Increasing demand for foreign goods can usually be interpreted as an expression of health within the domestic economy. But, we’ve also been seeing a steady increase in private lending and household debt in line with the expanding trade deficit.
Financing for the increasing trade deficit has come with increased foreign investment and capital flows – up until the beginning of this year when we saw a reverse in the trend.
Internal and External
New Zealand exports are being buoyed by increases in dairy prices due to a lack of supply in the market, as explained in previous articles. New Zealand is also one of the countries that have been expanding their reach into China lately, with the Asian giant being their largest customer despite the economic cooling. In fact, it was just on Monday the PM of New Zealand concluded a trade-boosting trip to China.
The rising demand for imports might be explained by the increased cost of crude, with fuel being one of New Zealand’s chief imports. But it’s not: that would be consumer items, in particular cars, which are bought primarily on credit in New Zealand. Should the RBNZ cut rates in the future, that would make credit easier for customers, and likely support the trend for higher imports.
Even though last month managed to eke out a small surplus, the trend towards deficit remains still clearly defined; a positive trade balance, and the concurrent strength in the NZD, would likely be an exception going forward.