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

By , Currency Analyst
06 December 2011 20:20 GMT

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

What’s Expected:

Time of release: 12/07/2011 20:00 GMT, 15:00 EST

Primary Pair Impact:NZDUSD

Expected: 2.50%

Previous: 2.50%

DailyFX Forecast: 2.50%

Why Is This Event Important:

The Reserve Bank of New Zealand is widely expected to maintain its current policy in December, but the statement accompanying the rate decision is likely to spark increased volatility in the exchange rate as market participants weigh the prospects for future policy. As the recent developments coming out of the isle-nation highlight an improved outlook for the region, the central bank may see scope to scale back the emergency rate cut from back in March, and Governor Alan Bollard may continue to soften his dovish tone for monetary policy as the rebuilding efforts from the Christchurch earthquake is expected to boost economic activity. However, Minister Bill English noted that the RBNZ may take cues from Australia – New Zealand’s largest trading partner – and we may see Governor Bollard preserve the wait-and-see approach in 2012 as the fundamental outlook for the global economy deteriorates.

Recent Economic Developments

The Upside

Release

Expected

Actual

Credit Card Spending s.a. (MoM) (OCT)

--

2.6%

Retail Sales ex Inflation (QoQ) (3Q)

0.6%

2.2%

Average Hourly Earnings (QoQ) (3Q)

0.7%

1.3%

The Downside

Release

Expected

Actual

Terms of Trade Index (QoQ) (3Q)

1.1%

-0.7%

RBNZ 2-Year Inflation Expectations (4Q)

--

2.8%

Consumer Prices (YoY) (3Q)

4.9%

4.6%

The pickup in wage growth paired with the expansion in private sector consumption may lead the RBNZ to hold an improved outlook for the region, and we may see the NZD/USD extend the rebound from 0.7370 as market participants raise bets for higher borrowing costs. However, the slowdown in global trade paired with easing price pressures may encourage the central bank to maintain a balanced tone for future policy, and Governor Bollard may talk down speculation for a rate hike in light on the ongoing turmoil in the world financial system drags on the recovery. In turn, the NZD/USD may give back the advance from earlier this month, and the exchange rate may fall back towards the 61.8% Fibonacci retracement from the 2009 low to the 2011 high around 0.7330-50 as interest rate expectations falter.

Potential Price Targets For The Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot009.png, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

How To Trade This Event Risk

Trading the given even risk may not be as clear cut as some of our previous trades as we expect the RBNZ to keep the benchmark interest rate at 2.50%, but comments from the central bank could pave the way for a long New Zealand dollar trade should the central bank show an increased willingness to overturn the 50bp rate cut from earlier this year. Therefore, if Governor Bollard talks up speculation for higher borrowing costs, we will need to see a green, five-minute candle following the announcement to generate a buy entry on two-lots of NZD/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance from the entry, 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 cost once the first trade reaches its mark in order to protect our winning.

On the other hand, the slower rate of inflation paired with the downturn in global trade may lead the central bank to turn increasingly cautious towards the economy, and we may see the RBNZ uphold its current policy over the coming in an effort to shield the isle-nation. As a result, if Mr. Bollard talks down expectations for a rate hike and endorses a wait-and-see approach for 2012, we will carry out the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse.

Impact that the RBNZ Interest Rate Decision has had on NZD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

OCT 2011

10/26/2011 20:00 GMT

2.50%

2.50%

+70

+288

October 2011 Reserve Bank of New Zealand Interest Rate Decision

As expected, the Reserve Bank of New Zealand kept the benchmark interest rate at 2.50%, but went onto say that the stronger-than-expected recovery ‘will require further cash rate increases’ as it raises the outlook for growth and inflation. RBNZ Governor Alan Bollard said ‘it remains prudent to keep the cash rate on hold for now’ in light of the ongoing turmoil in the world financial system, but went onto say that the rebuilding efforts from the Christchurch earthquake should ‘provide significant impetus for demand’ as economic activity gathers pace. As the central bank remains upbeat towards the economy, we may see the RBNZ scale back the emergency rate cut from March, and the central bank may continue to soften its dovish tone for monetary policy as growth prospects improve. The statement accompanying the rate decision spurred a bullish reaction in the New Zealand dollar, with the NZD/USD pushing back above 0.8000, and the high-yielding currency continue to gain ground throughout the day as the exchange rate closed at 0.8224.

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot008.png, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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06 December 2011 20:20 GMT