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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

2011-10-25 19:02:00
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: 10/26/2011 20:00 GMT, 16:00 EST

Primary Pair Impact: NZDUSD

Expected: 2.50%

Previous: 2.50%

DailyFX Forecast: 2.50%

Why Is This Event Important:

Although the Reserve Bank of New Zealand is widely expected to keep the benchmark interest rate at 2.50 percent, the statement accompanying the rate decision is likely to heavily influence the high-yielding currency as market participants weigh the outlook for monetary policy. The RBNZ may strike a cautious tone for the region given the slowdown in global growth, and we may see the central bank endorse a wait-and-see approach for the remainder of the year as policy makers aim to encourage an export-led recovery.

At the same time, Governor Alan Bollard may show an increased willingness to restore the cash rate to 3.00 percent as private sector activity improves, and hawkish comments from the central bank head should prop up the New Zealand dollar as market participants look for higher borrowing costs. According to Credit Suisse overnight index swaps, investors still see the cash rate increasing by more than 25bp over the next 12-months, and interest rate expectations should play a greater role in driving price action for the kiwi as the fundamental outlook for the world economy remains clouded with high uncertainty.

Recent Economic Developments

The Upside

Release

Expected

Actual

Credit Card Spending s.a. (MoM) (SEP)

--

1.6%

Retail Sales ex Inflation (2Q)

0.6%

0.9%

Private Wages ex Overtime (QoQ (2Q)

0.5%

0.5%

The Downside

Release

Expected

Actual

Consumer Prices (YoY) (3Q)

4.9%

4.6%

Gross Domestic Product (QoQ) (2Q)

0.5%

0.1%

Employment Change (QoQ) (2Q)

0.0%

0.0%

The expansion in private sector consumption paired with the rise in wage growth may encourage the RBNZ to toughen its stance against inflation, and speculation for a rate hike should lead the NZD/USD to extend the rally from 0.7471 as interest rate expectations gather pace. However, the slowdown in economic activity may lead the central bank to keep rates on hold over the remainder of the year, and dovish remarks from the RBNZ is likely to weigh on the exchange rate as market participants scale back speculation for higher borrowing costs. In turn, the NZD/USD may trade heavy over the near-term, and the exchange rate may threaten the rebound from earlier this month as investors raise bets for additional monetary support.

Potential Price Targets For The Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot008.png, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

How To Trade This Event Risk

Trading the given even risk may not be as clear cut as some of our previous trades as the RBNZ keeps the benchmark interest rate on hold, but hawkish comments from the central bank could pave the way for a long New Zealand dollar trade as market participants see higher borrowing costs on the horizon. Therefore, if the central bank raises its outlook for growth and inflation, we will need to see a green, five-minute candle following the announcement to establish a buy entry on two-lots of NZD/USD. We will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate of first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

On the other hand, easing price pressures paired with the slowdown in global growth paired may lead the RBNZ to maintain a cautious outlook for the region, and the central bank may talk down speculation for a rate hike as the fundamental outlook for the world economy remains clouded with high uncertainty. As a result, if Governor Bollard casts a dovish tone for monetary policy, we will carry out the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in the opposite direction.

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)

SEP 2011

09/14/2011 21:00 GMT

2.50%

2.50%

-52

+12

September 2011 Reserve Bank of New Zealand Interest Rate Decision

The Reserve Bank of New Zealand kept the benchmark interest rate at 2.50 percent in September, but held a cautious outlook for the isle-nation as the slowdown in the global economy dampens the prospects for an export-led recovery. The RBNZ warned that the marked appreciation in the local currency is ‘significantly penalizing some activity in the traded sector,’ and went onto say that there’s a ‘real risk that global economic activity slows sharply’ given the ongoing turmoil within the world financial system. As the central bank curbs its outlook for growth and inflation, we should see Governor Alan Bollard endorse a wait-and-see approach throughout the remainder of the year, and the central bank may continue to talk down speculation of restoring the cash rate to 3.00 percent as the fundamental outlook for the global economy deteriorates. The New Zealand dollar tumbled lower following the rate decision, with the NZD/USD slipping back below 0.8200, but the high-yielding currency regained its footing throughout the day as the exchange rate closed at 0.8234.

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Interest_Rate_Decision_body_ScreenShot007.png, NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song in the DailyFX Trading Room to cover the event LIVE!

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

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