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

By , Currency Analyst
12 September 2012 11:00 GMT

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

What’s Expected:

Time of release: 09/12/2012 21:00 GMT, 17:00 EDT

Primary Pair Impact: NZDUSD

Expected: 2.50%

Previous: 2.50%

DailyFX Forecast: 2.50%

Why Is This Event Important:

Although the Reserve Bank of New Zealand is widely expected to keep the benchmark interest rate at 2.50% in September, the fresh batch of central bank rhetoric may prop up the high-yielding currency as the central bank moves away from its easing cycle. Indeed, the RBNZ remains well positioned to normalize monetary policy ahead of its major counterparts as Governor Alan Bollard anticipates the rebuilding efforts from the Christchurch earthquake to boost economic activity, and it seems as though the central bank will endorse its wait-and-see approach for the twelfth straight meeting as the economic recovery gradually picks up.

Recent Economic Developments

The Upside

Release

Expected

Actual

NZ Card Spending – Retail (MoM) (AUG)

0.8%

3.0%

NBNZ Business Confidence (AUG)

--

19.5

Retail Sales ex Inflation (QoQ) (2Q)

0.7%

1.3%

The Downside

Release

Expected

Actual

Terms of Trade Index (QoQ) (2Q)

-2.0%

-2.6%

Private Wages ex Overtime (QoQ) (2Q)

0.6%

0.5%

Consumer Prices (YoY) (2Q)

1.1%

1.0%

The RBNZ may sound more upbeat this time around amid the ongoing expansion in private sector consumption paired with the rebound in business confidence, and we may see Governor Bollard scale back his dovish tone for monetary policy as growth prospects improve. However, the slowdown in global trade paired with easing price pressures may raise the RBNZ’s scope to provide additional monetary support, and we may see the New Zealand dollar struggle to hold its ground should the central bank show a greater willingness to implement another rate cut.

Potential Price Targets For The Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot028.png, NZDUSD: Trading the Reserve Bank of New Zealand Interest Rate Decision

As the NZDUSD continues to come off of the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 0.7900, we may see the upward trending channel from June continue to take shape, and the pair may threaten the August high (0.8223) should RBNZ Governor talk down speculation for additional monetary support. However, as the relative strength index approaches resistance around the 67 figure, we may see a short-term correction in the exchange rate, and the kiwi-dollar may track sideways over the near-term as the moving averages converge with one another.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous as the RBNZ is expected to maintain its current policy in September, but the policy statement may set the stage for a long New Zealand dollar trade should the central bank curb speculation for a rate cut. Therefore, if Governor Bollard softens his dovish tone for monetary policy, we will need to see a green, five-minute candle following the announcement to establish a buy entry on two-lots of NZDUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target 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 an effort to preserve our profits.

On the other hand, the ongoing slack in the real economy paired with the slowdown in global trade may become a growing concern for the RBNZ, and the central bank may sound more cautious this time around as the fundamental outlook for the world economy deteriorates. As a result, if Mr. Bollard shows a greater willingness to ease policy further, we will implement the same strategy for a short kiwi-dollar trade as the long position laid out above, just in the opposite direction.

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)

JUL 2012

07/25/2012 21:00 GMT

2.50%

2.50%

+29

+138

July 2012 Reserve Bank of New Zealand Interest Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot023.png, NZDUSD: Trading the Reserve Bank of New Zealand Interest Rate Decision

Indeed, the Reserve Bank of New Zealand kept the benchmark interest rate at 2.50% for 11 straight meetings, and it seems as though the central bank will preserve its current policy throughout the remainder of the year as Governor Alan Bollard expects the economy to ‘grow modestly over the next few years.’ Indeed, the New Zealand dollar tracked higher following the rate decision, with the NZDUSD climbing above the 0.7900 figure, and the high-yielding currency gained ground throughout the day to close at 0.8018.

--- 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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12 September 2012 11:00 GMT