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The unexpected record high of New Zealand trade deficit drove the kiwi to the defensive track and was followed by the negative notion over the Chinese currency. After a moderately steady path, the New Zealand currency was moving in a tight trading in the morning session on Thursday. Where will the disappointing economic data take the kiwi?

NZ Dollar on Chinese Devaluation

With the strong free trade agreement of New Zealand with China, the reported yuan currency devaluation has affected the enthusiasm over the kiwi. The Chinese government has been seeking stimulus to address the plunging trade numbers which lead to weakening its currency. Technically, the low currency value is a perfect instance for the exporters as the goods and services become more affordable.

Before the foreseen economic recovery take into place, the disappointing trade data last September erased the optimism over the Chinese economy. In the article China's Trade Data Spurs Economic Fears at FSM News, it indicated that “the General Administration of Customs cited that September’s 10% year-over-year plunge marks the sixth straight monthly decline as global demand for Asian goods remains obstinately anemic despite heading into the peak year-end shopping season.”

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The devaluation of yuan can boost domestic demand as the exports become more expensive and more competitive to foreign buyers. Later on, higher level of exports may lead to the betterment of the current account deficit, especially in the face of lack of competitiveness in the market. The improvement of the exports figure and aggregate demand will eventually boost the economic growth.

Since China is the largest export economy in the world, commodity currencies are just some of the most affected by its economic turbulence. Commodity currencies include the kiwi, the loonie and the Aussie. As included in the article NZD Locked in Short-term Sideways Move? On FSM News, “The New Zealand has a strong trade link with China, and knowing China as the largest consumer of commodities, any form of volatility is no good news for the kiwi. When the commodity prices soar, the value of the key commodity exporter’s currencies tends to jump as well.”

Further to this, Sheldon Slabbert, sales trader at CMC Markets, shared that the markets are taking a bit of a risk-off tone, but far more relevant domestically is the continuous devaluation of the Chinese yuan which suggests internal economic difficulties. “We've got some large exposure to China, which will affect Kiwi sentiment,” he added.

Trade Deficit Widens

Meanwhile, the strong September trade balance made the kiwi a little changed, although it was not always the case which surprised most of the market participants. As reported by the Statistics New Zealand, the trade deficit went up to NZD 1436 million last month, exceeding the expected NZD 1125 million – the biggest trade gap since 1951.

When trade deficits become sufficiently large and unsustainable, it will be associated with the weakening of the currency in the long term. The trade deficit is widely used as an economic indicator, whereas the country’s imports tend to exceed its exports. Therefore, the trade deficit shows the outflow of domestic currency to foreign markets and as the trade deficit continues to worsen, then it will lead to the weakness of the currency.

Separately, the declining meat exports contributed in the all-time high trade deficit recorded in the month of September. Statistics New Zealand confirmed that the meat sector fell from almost 35 percent. On the other hand, here are the list of the top ten commodity exported from New Zealand.

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(Chart taken from nzte.govt.nz)

Currency Outlook

As of 15:19 UTC, the kiwi was still trading lower against the greenback as it settled to 0.71381 after opening at 0.71365. The NZD/USD had a session high of 0.71433 and a session low of 0.71338 with a 397 total traded volume for today. The pair remained on moving towards the lower barrier as the trend gets weaker. As the band starts to contract, the pair may touch the 0.71440 level, similar to its path at the start of the week.

In light of the factors which may leave a great impact in the kiwi, it will likely stay in the defensive ground in the coming sessions. Adding to this, the expected December Fed rate hike can push the US currency even higher, a headache for a basket of currencies. Since the pair is bound to go beyond the lower band, there’s a reasonable chance of a buy signal as it is thought to be oversold.

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