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Middle-Earth, uh, I meant New Zealand, is gonna release its quarterly retail sales this Friday. This event usually generates a lot of volatility among Kiwi pairs so if you plan to trade this event, make sure to read up on another edition of my Forex Trading Guide.

For the newbie forex traders out there, the retail sales report is important because it is the primary indicator for gauging the level of consumer spending in New Zealand. Consumer spending, in turn, is important because it accounts for around 60% of Middle-Earth’s expenditure GDP.

Now that you’ve got the basics down pat, here are the three things to consider for Middle-Earth’s Q2 retail sales report:

1. The previous release

The headline reading for Q1 2015’s retail sales data was significantly better-than-expected at 2.7% (1.6% expected, 1.9% previous). The same was the case for the core reading with its 2.9% increase in sales volume (1.5% expected, 1.9% previous).

According to the Q1 retail trade report, the 2.7% increase in headline retail sales volume was the largest since September 2003. In addition, all 15 retail industries saw a pickup in sales volume, which is the first time that all industries saw an improvement since Q4 2006.

Overall, the previous retail sales readings were very good news indeed, which is why the initial reaction of most forex traders was to send the Kiwi higher shortly after the report was released.

NZD/USD 1-hour Forex Chart (May 14, 2015)
NZD/USD 1-hour Forex Chart (May 14, 2015)

Alas, the rally was rather short-lived, probably because forex traders who went long on the Kiwi the previous day (May 13, 2015) were getting out of their positions by fading into the rally. If you already forgot what happened on May 13, lemme remind y’all that the RBNZ announced a new loan-to-value policy meant to curb a potential housing bubble in the Auckland region, and many forex traders responded to that move by buying up the Kiwi.

Moving along, it’s also possible that the lack of buyer follow-through (and the eventual downtrend) was due to most long-term forex traders having a bearish bias on the Kiwi at the time, thanks to the RBNZ maintaining its easing bias during the April 30 rate statement.

2. Expectations for this release

Most forex traders and economists expect the headline reading for Q2 2015 retail sales to print a 0.5% increase, which is pretty disappointing when compared to the previous quarter’s 2.7% increase. The core reading, meanwhile, is expected to suffer the same fate since it is expected to only show a 0.7% increase after last quarter’s 2.9% increase.

Looking at related indicators, the Westpac: McDermott Miller New Zealand Consumer Confidence Index (CCI) for Q2 2015 slid down by 4.2 points to 113.0, which could mean potentially lower consumer spending since many respondents reported “feeling worse off financially.”

In addition, Q2 jobs data show that the jobless rate increased by 0.1% to 5.9% while the labor force participation rate declined by 0.2% to 69.3%. This means that fewer people have jobs and some of those who lost jobs or can’t find jobs just gave up, which isn’t exactly good for both consumer sentiment and consumer spending.

If the actual readings go beyond expectations, then the knee-jerk reaction of forex traders might be to load up on the Kiwi while readings which fail to meet expectations generally give forex traders cause to go on a Kiwi selling spree.

3. Current market sentiment for the Kiwi

Forex traders sold the Kiwi hard during the wee hours of Tuesday’s (August 11) Asian session, thanks to the 2.0% surprise devaluation of the Chinese yuan.

Why did forex traders sell off the Kiwi, you ask? Well, it’s because New Zealand exports a lot of commodities to China, and the devaluation of the yuan made New Zealand’s exports more expensive and therefore less competitive. This probably led some market watchers to bet that the RBNZ would enforce measures to devalue the Kiwi soon so that the competitiveness of New Zealand’s exports would not be lost. Aside from that, comdoll traders might also be feeling concerned that the yuan devaluation is a sign of further economic slowdown in China, which would mean even less demand for New Zealand’s commodity exports.

Will the Kiwi’s weakness continue? Perhaps. Well, I did make that nifty list earlier, arguing for further Kiwi weakness. In addition, the RBNZ has been calling for further exchange rate depreciation and remains open to further monetary policy easing.

The gist of it all is that the Kiwi seems to be subject to bearish pressure, for the near-term at least, so bullish moves due to the event may be quickly capped like the previous release while bearish moves would likely be fast and furious.