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FX Week Ahead - Top 5 Events: May RBNZ Meeting & NZD/USD Rate Forecast

FX Week Ahead - Top 5 Events: May RBNZ Meeting & NZD/USD Rate Forecast

2020-05-11 16:45:00
Christopher Vecchio, CFA, Senior Strategist

May RBNZ Meeting Overview:

  • The Reserve Bank of New Zealand meets on Wednesday, May 13 at 02:00 GMT; rates markets are pricing in a 12% chance of a 25-bps rate cut.
  • While the RBNZ has slashed interest rates to all-time lows to combat the coronavirus pandemic, rates markets are still expecting more monetary stimulus.
  • Retail traders are further net-short NZD/USD than yesterday and last week.
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The Reserve Bank of New Zealand convened an emergency meeting on March 16 to slash rates by 75-bps, cutting the main overnight cash rate to an all-time low of 0.25%. The coronavirus pandemic has not hit the New Zealand economy has hard as other developed economies, but that hasn’t stopped the RBNZ from going to its most extreme easing stance in its history in order to buffer the economy from contagion.

To this end, as part of the emergency interest rate cut, the RBNZ made clear that it would begin forward guidance, indicating that the main interest rate would stay at 0.25% for at least the next 12-months. But that doesn’t more can’t be done: the RBNZ noted that 0.25% “was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.”

Reserve Bank of New Zealand Interest Rate Expectations (May 11, 2020) (Table 1)

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Knowing that the RBNZ has said that they will keep rates at 0.25% for the next 12-months, and it’s possible that the New Zealand financial system may reach operational readiness for very low or negative interest rates, the pricing quirks in the overnight index swaps curve can’t be ignored: New Zealand overnight index swaps are pricing in the next rate cut coming as early as September 2020 (61%).

While the RBNZ will remain steady for the next few months, it is possible that more monetary stimulus comes down the pipeline before the year is out.

Pairs to Watch: AUD/NZD, NZD/JPY, NZD/USD

NZD/USD Rate Technical Analysis: Daily Chart (May 2019 to May 2020) (Chart 1)

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NZD/USD rates have made an impressive recovery from their March lows, not dissimilar from their antipodean brethren, AUD/USD. But the technical picture has become cloudier in recent days, as price momentum has started to fade ahead of a return back to significant resistance: the August 2015 low, September 2019 low, and initial March 2020 swing low constituting a zone around 0.6191/0.6204.

The start of the week has produced a bearish outside engulfing bar, with NZD/USD rates failing to reach their April 2020 highs, which formed in the midst of an evening star candle cluster – a bearish topping pattern. The subsequent bearish reversal pattern forming ahead of the May RBNZ meeting warns of potential downside over the course of the week.

To this end, NZD/USD bulls would likely be more comfortable above the 0.6191/0.6204, veritable evidence that the long-term bottom has been found, rather than just simply a near-term bottom that has produced an impressive bounce.

IG Client Sentiment Index: NZD/USD Rate Forecast (May 11, 2020) (Chart 2)

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NZD/USD: Retail trader data shows 42.91% of traders are net-long with the ratio of traders short to long at 1.33 to 1. The number of traders net-long is 10.55% lower than yesterday and 14.17% lower from last week, while the number of traders net-short is 13.25% higher than yesterday and 23.14% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bullish contrarian trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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