Trading the News: Reserve Bank of New Zealand Interest Rate Decision
Why Is This Event Important:
Interest rate expectations are the main driver of currency fluctuations which makes a change in monetary policy the biggest event risk for a currency. The RBNZ is expected to begin raising rates in the near-term which will generate considerable attention for this event, increasing the potential for volatility.
What’s Expected:
Time of release: 04/28/2010 22:45 GMT, 18:45 EST
Primary Pair Impact : NZDUSD
Expected: 2.50%
Previous: 2.50%
Will This Be Market Moving (Scenarios):
The RBNZ has targeted the middle of 2010 as the soonest for a change in policy which is why markets are expecting the central bank will leave their target interest rate at 2.50% at today’s meeting. However, policy makers could confirm that tightening will begin at their June 9th meeting which could generate New Zealand dollar support. Most central banks are expected to raise rates several times once they set a different course in policy as was seen with the RBA. Therefore, look for markets to begin pricing in higher interest rates which could spark an extended “kiwi” rally. The Bank of Canada foreshadowing a rate hike of their own at their last meeting has raised expectations for the RBNZ, as both economies along with Australia are commodity driven. Surging emerging markets demand has fueled growth and raises the risks of inflation.
The Upside
A surprise rate hike should send the “kiwi” soaring just on interest rate differentials alone. However, the potential for follow through could be limited with the prevailing concerns over European sovereign debt and it potential as a broader contagion. The S&P followed up its downgrades of Greece and Portugal yesterday by lowering Spain’s credit rating and issuing a negative outlook. Yet, commodity dollar’s have taken the recent news in stride which could be a sign that markets have already priced in the negative news, opening the door for a stronger upside New Zealand dollar move.
The Downside
Considering the broader trends a dovish RBNZ could sink the “kiwi” , especially if we see markets look to front run a possible rate hike. Additionally, a FOMC rate decision before hand must be taken into account as the prospect of higher U.S. interest rates could generate dollar support. The prospect of the interest rate differential between the two countries narrowing would be extremely bearish for the NZD/USD.
How To Trade This Event Risk
A rate hike or hint at near-term tightening could spark considerable New Zealand dollar support . However, with the potential for broader risk aversion to build we will wait for confirmation of bullish conviction. Therefore, we will need to see a second blue, five-minute candle following the release to generate a buy entry on two-lots of NZD/USD. We will then place the initial stop at the nearby swing high or a reasonable distance once these conditions have been fulfilled, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second-lot to breakeven once the first lot reaches its mark in an effort to lock-in our profits.
Conversely, a dovish RBNZ and broader dollar support could weigh in the pair, especially if the FOMC strikes a more hawkish tone. As a result, we will favor a bearish outlook for the “kiwi”, and will utilize the same strategy for a short NZD/USD trade as the long position laid out above, just in the opposite direction.
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:
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To discuss this report contact David Song, Currency Analyst: jrivera@fxcm.com
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