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

Forex: NZD/USD- 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:12/05/2012 20:00 GMT, 15:00 EST

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 December, but the statement accompanying the rate decision may increase the appeal of the high-yielding currency should the central bank drop its dovish tone for monetary policy. Indeed, the RBNZ may continue to strike a cautious outlook for the region amid the slowdown in global growth, but we may see Governor Graeme Wheeler hint at an imminent rate hike in an effort to address the risks surrounding the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

NZ Card Spending – Retail (MoM) OCT)

0.3%

0.4%

REINZ Housing Price Index (MoM) (OCT)

--

1.5%

REINZ House Sales (YoY) (OCT)

--

32.6%

The Downside

Release

Expected

Actual

Terms of Trade Index (QoQ) (3Q)

-1.5%

-3.2%

Retail Sales ex Inflation (QoQ) (3Q)

0.4%

-0.4%

Employment Change (QoQ) (3Q)

0.3%

-0.4%

As Governor Wheeler highlights the ongoing rise in home prices paired with the expansion in private sector credit, the central bank may sound more hawkish this time around, and the RBNZ may look to lift the benchmark interest rate off the record-low to avoid planting the seed for an asset bubble. However, the ongoing slack within the real economy paired with the weakening outlook for world trade may encourage the central bank head to preserve a neutral tone for monetary policy, and the policy statement may renew speculation for additional monetary support should the RBNZ scale back its outlook for growth and inflation.

Potential Price Targets For The Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot107.png, Forex: NZD/USD- Trading the Reserve Bank of New Zealand Rate Decision

As the RBNZ remains on the sidelines, we should see the NZDUSD maintain the range-bound price action from earlier this month, and the pair may revert back to the 0.8100 figure should the central bank continue to highlight the downside risks surrounding the region. However, Governor Wheeler may adopt a more hawkish tone for monetary policy amid the budding signs of a potential asset bubble, and we will look for a break and a close above the 0.8300 figure to favor a bullish outlook for the kiwi-dollar.

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 December, but the policy statement may instill a bullish outlook for the New Zealand dollar should the central bank drop its dovish tone for monetary policy. Therefore, if Governor Wheeler 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 slowdown in global trade 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 fundamental outlook for the region deteriorates. 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)

OCT 2012

10/24/2012 20:00 GMT

2.50%

2.50%

+50

+27

October 2012 Reserve Bank of New Zealand Interest Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot105.png, Forex: NZD/USD- 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% as Graeme Wheeler replaced Alan Bollard as the head of the central bank, and the new Governor may retain a wait-and-see approach over the remainder of the year as the rebuilding efforts from the Christchurch earthquake is expected to boost economic activity. The neutral tone held by the RBNZ propped up the New Zealand dollar, with the NZDUSD climbing above the 0.8200 figure, but we saw the higher-yielding currency consolidate throughout the day as the pair closed at 0.8176.

--- 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, please follow this link.

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