Tuesday registered a surprise beat in electronic card retail sales data. Now, the next bit of market-moving data is tomorrow’s (or later tonight, depending on where you are) BusinessNZ Manufacturing Index.
This is like the Kiwi version of PMI and it can change the direction of the currency.
So far this week, the NZD has been trending stronger thanks to a series of good data. The resumption of trade talks is also a contributing factor.
Some analysts are pointing to the trend continuing at least until next Wednesday’s FOMC meeting. Expectations for the Fed to cut rates are keeping the kiwi bid against its American counterpart.
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What We Are Looking For
The consensus among analysts is for the PMI data to return to just barely expansion at 50.2. This would be up substantially from 48.2 in the prior month.
July was the first time that this series dropped into contraction since mid-2013. So, a return to expansion, even if just technically, would likely be a relief to markets.
The worrisome part when it comes to the medium-term outlook is that not only has the manufacturing PMI been trending downward since the beginning of the year, but it continued to do so even as the RBNZ was cutting rates. And the rate cuts were part of an effort to spur growth and make access to capital easier.
There is More Hope Than Actuality
The expectations of a more upbeat number are banking on an improving outlook, rather than the current situation. We should remember that the PMI is a composite averaging the businesses’ perception of the current environment, and how they see it will be in six months.
Usually, the current situation tends to be better than the outlook, simply because there is uncertainty about what will happen in the future.
But, if the RBNZ’s plans were to work, and the trade dispute between the US and China were to be resolved, then that would give businesses a reason to expect a better future. Therefore, it would raise the total PMI despite a generally depressed view of the current situation.
At the beginning of the week, we had some disappointing manufacturing volume data. It showed that the sector was slowing faster in the second quarter than expected.
This would lead us to suspect that PMIs will be less than auspicious for now. Especially considering that during the last quarter, businesses reported that they intended to keep, or in some cases cut, their capital expenditure programs.
The thing about New Zealand manufacturing is, though, that it’s mostly for the domestic market. Industrial exports from New Zealand account for a very small section of the market, indicating that the results in the PMI are a better reflection of the domestic economy, than any effect the country might be having from the trade war.
There is Cause for Strength
On that note, many analysts argue that New Zealand is less affected than other countries by the trade issues because even though China is the nation’s largest importer, it’s primarily of consumer goods for the domestic market. And China’s domestic figures have remained healthy since May of last year.
In summary, barring unforeseen circumstances, there are several issues lining up to support NZD strength in the short term. The question is whether the RBNZ will be satisfied with the economic figures and reemphasize its easing bias.
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