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How Will the New Zealand Dollar Respond to the RBNZ's Rate Cut Today?

Wednesday, 22 October 2008 14:53:20 GMT  |  Terri Belkas, Currency Strategist

This afternoon, the Reserve Bank of New Zealand is anticipated to cut rates by as many as 100bps to 6.50 percent as economic concerns outweigh inflation fears. Such a sharp reduction in interest rates could trigger substantial losses for the New Zealand dollar, but which pair will be best for trading this sort of news?

According to a Bloomberg News survey of 11 economists, 9 believe the Reserve Bank of New Zealand will cut rates by an incredible 100bps this afternoon to 6.50 percent while the rest are betting on a 75bp cut. While inflation measures remain very high, the New Zealand economy has officially fallen into recession as GDP contracted for two consecutive quarters (-0.3 percent in Q1, -0.2 percent in Q2). Furthermore, the credit crisis taking a harsh toll on New Zealand’s financial markets, especially since interest rates already remain restrictive at 7.50 percent (though this is down from June’s 10-year high of 8.25 percent). 

The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. If the RBNZ cuts rates by 100bps and signals that they will reduce rates further, this sentiment may be exacerbated and the New Zealand dollar will likely plunge. Looking at NZD/USD, a bearish target that could easily be achieved is the recent low of 0.5785. A better pair to watch in light of such news may be AUD/NZD, though, since it has already been consolidating for quite a while and may be more likely to break out. In fact, AUD/NZD could manage to break the recent highs to test 1.1496 or even 1.1703 if the RBNZ indicates that rates may be cut all the way down to 4.5 percent over the next 12 months, as Credit Suisse overnight index swaps are pricing in. On the other hand, a smaller than expected reduction in interest rates or comments suggesting that the RBNZ may pause next time could allow the Kiwi to recover slightly against its counterparts.

NZD/USD (240 Minute Chart)

Source: Intellicharts

AUD/NZD (Daily Chart)

Source: Intellicharts

Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com

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