NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision
Trading the News: Reserve Bank of New Zealand Interest Rate Decision
Time of release: 03/10/2010 20:00GMT, 15:00 EST
Primary Pair Impact : NZDUSD
Impact the RBNZ Interest Rate Decision has had on NZDUSD through the last 2 meeting
January 2010 RBNZ Interest Rate Decision
|The New Zealand central bank kept borrowing costs at the record-low of 2.50% in January and pledged to keep the cash rate at its current level until the middle of the year as inflation is likely to remain within its target range until 2012. Reserve Bank of New Zealand Governor Alan Bollard stated that “if the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010,” and the statement reiterates his comments made back in December as the recovery gathers momentum. Moreover, Mr. Bollard went onto add that the nation “continues to recovery” and “policy stimulus and improving export earnings have seen a pickup in household spending,” but maintained a watchful outlook for the domestic economy as “households remain cautious, with credit growth subdued.”|
December 2009 RBNZ Interest Rate Decision
|The Reserve Bank of New Zealand held the benchmark interest rate at 2.50% for the fifth consecutive month, with policy makers stating that they will wait until the middle of next year before raising interest rates because a rising currency is helping contain inflation as the economy emerges from the recession. Meanwhile, RBNZ Governor Alan Bollard publicized that “If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” and added that inflation will remain subdued and household spending will be constrained by rising unemployment. As a result, the central bank is likely to keep borrowing costs at the record-low throughout the first-half of the year as Mr. Bollard continues to see ongoing weakness within in the domestic economy.|
What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on NZDUSD ahead of the data release.
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on NZDUSD ahead of the data release.
How To Trade This Event Risk
The Reserve Bank of New Zealand is widely anticipated to keep the benchmark interest rate at 2.50% this week in an effort to balance the downside risks for the economy, and comments following the rate decision are likely to stoke increased volatility in the exchange rate as investors weigh the prospects for future policy. A Bloomberg News survey shows all of the 14 economists polled forecast the central bank to hold the cash rate steady in March, while investors are pricing a one percent chance for a rate hike this month as Governor Alan Bollard pledges to keep borrowing costs at the record-low throughout the first-half of the year. A report by Statistics New Zealand showed consumer prices unexpectedly contracted 0.2% in the fourth quarter after rising 1.3% in the previous three-month period, while producer prices slipped 0.4% during the same period amid forecasts for a 0.4% rise. Moreover, retail spending increased 1.0% during the final three-months of 2009, which fell short of expectations for a 1.4% rise, while the unemployment rate surged to 7.3% during the same period to mark the highest reading since the third-quarter of 2009.
As a result, RBNZ Governor Alan Bollard said that the recovery is “still fragile” during a Q&A session on Television New Zealand, given the ongoing weakness in the domestic economy, and expects to see “reasonable growth figures” this year as the nation emerges from the recession. In addition, the central bank head went onto say “very soft monetary policy” will support growth going forward as the government stimulus continues to feed through the real economy, and noted that the nation could “take advantage” of the economic expansion in Australia as the $1 economy remains New Zealand’s biggest trading partner. As Governor Bollard maintains a cautious outlook for the region, we are likely to see the central bank uphold its pledge to maintain its current policy throughout the first-half of the year, but dovish rhetoric following the meeting is likely to spark increased selling pressures on the exchange rate as investors scale back expectations for a rate hike later this year.
Trading the given event risk is certainly not as clear cut as some of our previous trades as the RBNZ is widely anticipated to maintain the cash rate at 2.50% this month. However, price action following hawkish remarks could set the stage for a long New Zealand dollar trade as the central bank aims to normalize policy this year. Therefore, if Governor Bollard sees scope to raise borrowing costs going into the second-half of the year, we will need to see a green, five-minute candle following the statement to confirm a buy entry on two-lots of NZD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will establish our first mark. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to lock-in our profits.
On the other hand, fading demands for employment paired with the ongoing weakness in the domestic economy could lead the RBNZ to keep rates steady going into the second-half of the year, and dovish comments following the rate decision could lead investors to lower their expectations for a rate hike as the central bank aims to encourage a sustainable recovery. As a result, if Governor Bollard expects the cash rate to sit pat at 2.50% during the third-quarter, we will favor a bearish outlook for the New Zealand currency, and will utilize the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.
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