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NZD/USD to Breakout Should RBNZ Favor Series of Rate Hikes

By , Currency Analyst  and Gregory Marks
12 March 2014 16:00 GMT

- Reserve Bank of New Zealand to Raise Rates for First Time Since 2010

- Markets Pricing 98% Chance for 25bp Rate Hike According to OIS

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

According to a Bloomberg News survey, all of the 15 economists polled see the Reserve Bank of New Zealand (RBNZ) raising the benchmark interest rate by 25bp in March, and the central bank may look to normalize monetary policy throughout 2014 as the pickup in economic activity raises the outlook for growth and inflation.

What’s Expected:

Time of release: 03/12/2014 20:00 GMT, 16:00 EDT

Primary Pair Impact: NZD/USD

Expected: 2.75%

Previous: 2.50%

DailyFX Forecast: 2.75%

Why Is This Event Important:

Indeed, RBNZ Governor Graeme Wheeler may sound a more hawkish this time around amid the ongoing threat of an asset-bubble, and interest rate decision may spur fresh highs in the New Zealand dollar should the central bank show a greater willingness to implement a series of rate hike over the coming months.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Trade Balance (JAN)

230M

306M

Employment Change (QoQ) (4Q)

0.6%

1.1%

Private Wages ex Overtime (QoQ) (4Q)

0.5%

0.6%

With that said, the RBNZ may lay out a more detailed exit strategy in light of the pickup in global trade along with the ongoing improvement in the labor market, and a material shift in the policy outlook should prop-up the higher-yielding currency as the central bank moves away from its easing cycle.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Building Permits (MoM) (JAN)

-3.5%

-8.3%

ANZ Consumer Confidence (MoM) (FEB)

--

-2.1%

Retail Sales ex Inflation (QoQ) (4Q)

1.7%

1.2%

Nevertheless, the RBNZ may stick to its current policy amid the threats surrounding the Emerging Market (EM) economies, and the kiwi may give back the advance carried over from the previous month should the central bank defy market expectations and keep borrowing costs on hold.

How To Trade This Event Risk(Video)

Bullish NZD Trade: RBNZ Raises Rates & Pledges to Normalize Further in 2014

  • Need green, five-minute candle following a hawkish statement to consider a long NZDUSD trade
  • If market reaction favors a long trade, buy NZDUSD with two separate position
  • Set stop at the near-by swing low/reasonable distance from cost; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bearish NZD Trade: Governor Wheeler Disappoints & Preserves Current Policy

  • Need red, five-minute candle to favor a short NZD/USD trade
  • Implement same strategy as the bullish New Zealand dollar trade, just in opposite direction

Potential Price Targets For The Rate Decision

NZD/USD Daily

NZD/USD Chart

Daily Chart - Created Using FXCM Marketscope 2.0

  • Stuck in Wedge/Triangle Formation From 2011; Bullish Breakout on Tap?
  • Relative Strength Index Preserves Bearish Trend Dating Back to November
  • Interim resistance: 0.8540-50 (50.0% expansion)
  • Interim support: 0.8220 (38.2% retracement) to 0.8230 (38.2% retracement)

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)

Jan 2014

01/29/2014 20:00 GMT

2.50%

2.50%

-52

-86

January 2014 Reserve Bank of New Zealand Interest Rate Decision

RNNZ - Reserve Bank of New Zealand Interest Rate Decision

As the RBNZ left rates at 2.50% at the January meeting amid speculation of a hike, the NZD/USD pair fell 52 pips to the downside within the hour and went on to suffer losses below the 81 level in the following days. Since then we have seen a resumption of the uptrend and nearing the rate decision markets are pricing in a 25bps hike. It is important to note that just because rate hikes traditionally can trigger strength in a currency, the fact that markets have largely priced in these developments may adversely impact the NZD/USD if we only see a 25bps hike.

--- Written by David Song, Currency Analyst and Gregory Marks

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

To be added to David's e-mail distribution list, please follow this link.

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12 March 2014 16:00 GMT