trading news reports

NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

The Reserve Bank of New Zealand is widely expected to hold the benchmark interest at 2.50% for the fourth consecutive meeting in October, and the isle nation’s currency is likely to face increased volatility over the next 36 hours of trading as investors weigh the outlook for future policy.

Trading the News: Reserve Bank of New Zealand Interest Rate Decision

What’s Expected
Time of release:        10/28/2009 20:00GMT, 16:00 EST
Primary Pair Impact :    NZDUSD
Expected:         2.50%
Previous:         2.50%

Impact the RBNZ Interest Rate Decision has had on NZDUSD through the last 2 meeting

September 2009 RBNZ Interest Rate Decision

The Reserve Bank of New Zealand held the benchmark interest rate at 2.50% for the third month as policy makers anticipate a “patchy recovery,” but held an improved outlook for future growth as the board projects economic activity to expand at an annual pace of 1.3% in 2010 amid an initial forecast for a 0.8% rise in June. The central bank said that “there is more evidence that the decline in economic activity is coming to an end” as policy makers see the $128B emerging from the recession, but went onto say that there “is still sufficient risk and uncertainty around the recovery” to maintain the expansion in monetary policy. Moreover, the RBNZ said that the marked appreciation in the exchange could hamper the prospects for a sustainable recovery, and state that the “recovery will be brought into question” if the currency continues to strengthen going forward.

July 2009 RBNZ Interest Rate Decision

The New Zealand central bank left borrowing costs unchanged at 2.50% for the second consecutive month in July and is likely to maintain a neutral policy stance going forward as policy makers anticipate economic activity to expand throughout the second half of the year. At the same time, Reserve Bank of New Zealand Governor Alan Bollard stated that “the forecast recovery is based on a further easing in financial conditions” and went on to say that the key rate “could still move modestly lower over the coming quarters” as they see a risk for a slower recovery. Moreover, Finance Minister Bill English said that the exchange rate remains “higher than fundamentals warrant” after pressing the RBNZ to lower rates further, and the appreciation in the New Zealand dollar may continue to weigh on the economic outlook as global trade conditions remain subdued.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on NZDUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on NZDUSD ahead of the data release.

How To Trade This Event Risk

The Reserve Bank of New Zealand is widely expected to hold the benchmark interest at 2.50% for the fourth consecutive meeting in October, and the isle nation’s currency is likely to face increased volatility over the next 36 hours of trading as investors weigh the outlook for future policy. A Bloomberg News survey shows all of the 11 economists polled forecast the central bank to hold borrowing costs steady this month, while Credit Suisse overnight index swaps are up 235bp, and the rise in the interest rate outlook may continue to drive the New Zealand dollar higher throughout the second-half of the year as market participants speculate the board to tighten policy over the next 12-months. The RBNZ removed its Term Auction Facility earlier this month, which allowed banks to borrow funds using bills, bonds, and mortgage-backed securities as a guarantee, and ended its weekly bill auction following the stabilization in the financial system, and the central bank may continue to normalize policy over the coming months as the economy emerges from the recession. Nevertheless, Prime Minister John Key argued that “the very high exchange rate is helping offset any imported inflation concerns,” and expects the RBNZ to hold borrowing costs steady throughout the remainder of the year as the currency remains “a little bit overvalued.” At the same time, central bank Governor Alan Bollard said that strength in the New Zealand dollar will not stop the central bank from managing monetary policy accordingly and noted that the appreciation has been driven by the underlying weakness in the greenback, but reiterated that borrowing costs are likely to stay pat until “the latter part of 2010” as the outlook for global growth remains uncertain. As a result, the central bank head is likely to maintain his pledge to hold the cash rate steady going into the following year and may turn increasingly dovish as the marked appreciation in the exchange rate tapers the risks for inflation. 

Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, as market participants anticipate the RBNZ to hold the benchmark interest at 2.50%, commentary following the rate decision is likely to move the markets as investors weigh the outlook for future policy. Therefore, if the central bank holds an enhanced outlook for the region and adopts a hawkish tone, we will favor a bearish outlook for the New Zealand dollar and will look for a green, five-minute candle following the meeting to generate a buy entry on two-lots of NZD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, as policy makers hold a cautious outlook for the $128B economy and expect a “patchy recovery” to follow going into 2010, the central bank may hold a neutral policy stance throughout the second-half of the year, and dovish commentary subsequent to the rate decision is likely to weigh on the exchange rate as investors scale back expectations for higher borrowing costs. As a result, if the RBNZ reiterates rates will stay low throughout the first half of the following year and expects price pressures to remain subdued over the coming months, we will look to sell the NZD/USD, and will follow the same setup for a short kiwi-dollar trade as the long position mentioned above, just in reverse.

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