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NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

2011-03-07 22:08:00
David Song, Currency Strategist
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Trading the News: Reserve Bank of New Zealand Interest Rate Decision

What’s Expected:

Time of release: 03/09/2011 20:00 GMT, 15:00 EST

Primary Pair Impact:NZDUSD

Expected: 2.75%

Previous: 3.00%

DailyFX Forecast: 2.50% to 2.75%

Why Is This Event Important:

The Reserve Bank of New Zealand is widely expected to lower the benchmark interest rate by 25bp to 2.75% in March, and speculation for another round of monetary easing could spark a sharp selloff in the exchange rate as investors weigh the prospects for future policy. According to Credit Suisse overnight index swaps, investors a pricing a 100 percent chance for a rate cut this month, and the central bank may look to support the real economy throughout 2011 in an effort to stem the risk for a double-dip recession. As the region copes with the aftermath of the natural disasters, the RBNZ may continue to curb their outlook for growth and inflation, and dovish comments from the central bank is likely to exacerbate the downturn in the exchange rate as interest rate expectations falter.

Recent Economic Developments

The Upside

Release

Expected

Actual

Trade Balance (JAN)

-25M

11M

NBNZ Business Confidence (FEB)

--

34.5

Business NZ PMI (JAN)

--

53.7

The Downside

Release

Expected

Actual

RBNZ 2-Year Inflation Expectation (JAN)

--

2.6%

Employment Change (QoQ) (4Q)

0.2%

-0.5%

Retail Sales (DEC)

-0.4%

-1.1%

As the isle-nation continues to benefit from the expansion in global trade, with businesses increasing their rate of production, the recent developments may encourage the RBNZ to keep the benchmark interest rate at 3.00% in March as rising commodity prices heightens the risk for inflation. However, as employment contracts for the second time in 2010, with households scaling back on consumption, the central bank may revert back to a loosened policy stance in order to promote a sustainable recovery. In turn, the NZD/USD may continue to retrace the advance from the previous year, and the exchange rate may work its way back below 0.7000 over the near-term if the central bank sees scope to expand monetary policy further over the coming months.

Potential Price Targets For The Release

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot012.png, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

How To Trade This Event Risk

Trading the rate decision certainly reinforces a bearish outlook for the New Zealand dollar as investors expect the RBNZ to cut the interest rate in March, but the central bank may surprised the market and retain its wait-and-see approach as the region continues to benefit from the rise in global trade. As a result, if the RBNZ keeps the cash rate a 3.00%, we will need a green, five-minute candle subsequent to the announcement in order to establish 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 after taking market volatility into account, and this risk will generate our first target. The second objective 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 order to preserve our profits.

In contrast, the central bank may adopt a dovish outlook for future policy in order to combat the risk for a double-dip recession, and speculation for another round of monetary easing is likely to bear down on the high-yielding currency as interest rate expectations falter. Therefore, if the RBNZ lowers borrowing costs by 25bp or more in March, we will implement the same strategy for a short kiwi-dollar trade as the long position laid out above, just in reverse.

Impact the RBNZ Interest Rate Decision has had over the NZD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jan 2011

01/26/2011 20:00 GMT

3.00%

3.00%

+48

+66

January 2011 Reserve Bank of New Zealand Rate Decision

As expected, the Reserve Bank of New Zealand held the benchmark interest rate at 3.00% in January, and the central bank may retain its wait-and-see approach throughout the first-half of the year as it aims to balance the risks for the region. The RBNZ said borrowing costs are likely to “increase modestly” going forward as the central bank expects inflation holds “comfortably” within the 1 to 3 percent target range over the medium-term, and Governor Alan Bollard may look to preserve a neutral outlook for future policy given the uncertainties surrounding the economic outlook. At the same time, the RBNZ reiterated that economic activity was weaker-than-expected in the second-half of 2010 given the ongoing weakness within the private sector, but went onto say that “forward indicators of activity have firmed somewhat” as the region benefits from the rise in global trade. The positive outlook held by the RBNZ spurred a rally in the local currency, with the NZD/USD advancing to a high of 0.7726, and the near-term rally in the exchange rate may gather pace going forward as investors expect the central bank to tighten monetary policy further this year.

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot013.gif, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

Questions? Comments? Join us in the DailyFX Forum

Join Currency Strategist John Kicklighter in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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