Record Trade Deficit could mean a RBNZ Rate Cut

Record Trade Deficit could mean a RBNZ Rate Cut
by, David Frank, Economist, Bullish University

Since October 13, the New Zealand Dollar has been salvage mode. The Kiwi has struggled to recover from a near six percent fall over the last 25 trading days. This downfall began in early September. A lot of the data that fuels strength of the local currency has been absent in the exporting nation. New Zealand relies on its exports to fuel their economy and the declining terms of trade is a tough pill to swallow. The central bank, the Reserve Bank of New Zealand (RBNZ), might be more encouraged now to cut rates at their next monetary policy meeting.

The terms of trade is the ratio of the price of exports, like diary subtracted by the price of imports which are then converted into export and import indices. You can also read the terms of trade or TOT as the relative cost of imports against the relative cost of exports. In an exporting nation like New Zealand, you always want to see the TOT rising. This means they can buy more imports with the same amount of exports. The Declining TOT means that New Zealand is paying more for imports because the price of their exports, which keep their economy moving along, are falling in terms of imports they must buy.

What does the falling terms of trade mean? The falling TOT is why New Zealand’s economy has posted its largest trade deficit on record, last week. The number came in a NZ$-1.436 billion with exports at NZ$ 3.42 billon against exports at NZ$ 4.9 billion. This rise in import prices is partly thanks to NZ$ 273 million in aircraft purchases. However, the widening trade deficit, specifically the trend, is very troubling. This data is leading traders to believe that action from the RBNZ is likely at their November 10 monetary policy meeting. However, the RBNZ is likely to be happy with the six percent drop in the Kiwi Dollar as they sold NZ$ 1 million in September.

There is some good news that inflation is likely to tick up. Still it will be short of its two percent target. As the price of crude has gone up, global inflation numbers are moving higher. However, the price of crude is, once again moving lower. Global inflation is also very unlikely to help the economy of New Zealand, as their main export is dairy, which is expected to have a volume of 4.1 over the next season. Rising core inflation, in certain countries, could also be a drag on dairy imports, pushing prices a bit lower. Thus not helping New Zealand.

The economic calendar is pretty quiet for the New Zealand Dollar this coming week. The unemployment report is due this week. The unemployment rate is expected to stay put at 5.1 percent offering no clues into RBNZ monetary policy insight. The New Zealand Dollar could remain steady, if not float higher, on a risk-off environment. In order for that to happen, data needs to come in at expectations or stronger-than-expectations. If this happens, then Forex traders will see if the Kiwi Dollar can outpace other high-yielding currencies in the Forex universe.

 

from Bullish University http://ift.tt/2e15HZw