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NZDUSD: Trading the Reserve Bank of New Zealand Rate Decision

NZDUSD: Trading the Reserve Bank of New Zealand Rate Decision

David Song, Strategist

Trading the News: Reserve Bank of New Zealand Interest Rate Decision

What’s Expected:

Time of release: 07/25/2012 21:00 GMT, 17:00 EDT

Primary Pair Impact: NZDUSD

Expected: 2.50%

Previous: 2.50%

DailyFX Forecast: 2.50%

Why Is This Event Important:

The Reserve Bank of New Zealand is widely expected to keep the benchmark interest rate at 2.50% in July, but the statement accompanying the rate decision may increase the appeal of the high-yielding currency should the central bank strike a neutral tone for monetary policy. Indeed, the RBNZ may continue to strike a cautious outlook for the region amid the ongoing turmoil in the global economy, but we may see Governor Alan Bollard continue to endorse its wait-and-see approach as central bank officials anticipate the rebuilding efforts from the Christchurch earthquake to foster a stronger recovery later this year.

Recent Economic Developments

The Upside

Release

Expected

Actual

Trade Balance (JUN)

2M

331M

Gross Domestic Product (QoQ) (2Q)

0.4%

1.1%

Employment Change (QoQ) (1Q)

0.3%

0.4%

The Downside

Release

Expected

Actual

Consumer Prices (YoY) (2Q)

1.1%

1.0%

Retail Sales ex Inflation (QoQ) (1Q F)

--

-0.6%

RBNZ 2-Year Inflation Expectation (2Q)

--

2.4%

The rebound in trade paired with the ongoing improvement in the labor market gives the RBNZ scope to preserve its current policy, and Governor Bollard may continue to strike a neutral tone for monetary policy as the central bank head remains upbeat towards the economy. However, as easing price pressures along with the slowdown in private sector consumption dampens the outlook for the region, the RBNZ may show a greater willingness to provide additional monetary support, and dovish comments from the central bank may trigger a selloff in the exchange rate as market participants raise bets for a rate cut.

Potential Price Targets For The Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot094.png, NZDUSD: Trading the Reserve Bank of New Zealand Rate Decision

The technical outlook instills a bearish forecast for the NZDUSD as the pair struggles to maintain the range carried over from the previous month, and the downward trend in the relative strength index certainly foreshadows lower prices for the kiwi-dollar as it appears to have carved out a lower top in July. However, a less dovish RBNZ may strengthen the rebound off of the 50-Day SMA (0.7806), and we may see the pair threaten the downward trend from 2011 should the central bank curb speculation for lower borrowing costs.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous as the RBNZ is expected to maintain its current policy in July, but the policy statement may instill a bullish outlook for the New Zealand dollar should the central bank soften its dovish tone for monetary policy. Therefore, if Governor Bollard talks down expectations for a rate cut, we will need to see a green, five-minute candle following the announcement to establish a buy entry on two-lots of NZDUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our 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 hits its mark in order to preserve our profits.

On the other hand, the ongoing slack in the real economy paired with the easing price growth may push the RBNZ to strike a highly dovish tone for monetary policy, and speculation for lower borrowing costs may spark a sharp selloff in the exchange rate as market participants increase bets for a rate cut. As a result, if the central bank shows a greater willingness to lower the cash rate from 2.50%, we will implement the same strategy for a short kiwi-dollar trade as the long position laid out 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)

JUN 2012

06/13/2012 21:00 GMT

2.50%

2.50%

+40

+98

June 2012 Reserve Bank of New Zealand Interest Rate Decision

NZDUSD_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot090.png, NZDUSD: Trading the Reserve Bank of New Zealand Rate Decision

As expected, the Reserve Bank of New Zealand kept the benchmark interest rate at 2.50% amid the ongoing turmoil in the global economy, and it seems as though Governor Alan Bollard will preserve the wait-and-see approach throughout 2012 as the central bank head expects the rebuilding efforts from the Christchurch earthquake to spark a faster recovery later this year. In turn, we saw the NZDUSD climb back above the 0.7750 figure and the pair continued to gain ground throughout the day as the pair closed at 0.7824.

--- 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

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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

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

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