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

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: 03/13/2013 20:00 GMT, 16:00 EDT

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 (RBNZ) is widely expected to keep the benchmark interest rate at 2.50%, the statement accompanying the rate decision may increase the appeal of the high-yielding currency as the central bank adopts a hawkish tone for monetary policy. Indeed, RBNZ Graeme Wheeler may continue to highlight the boost in economic activity coming off of the rebuilding efforts from the Christchurch earthquake, and the central bank head may show a greater willingness to lift the cash rate off the record-low in an effort to stem the risk for an asset bubble.

Recent Economic Developments

The Upside

Release

Expected

Actual

REINZ Housing Price Index (MoM) (FEB)

--

1.6%

QV House Prices (YoY) (FEB)

--

6.3%

Retail Sales ex Inflation (4Q)

1.4%

2.1%

The Downside

Release

Expected

Actual

Terms of Trade Index (QoQ) (4Q)

1.2%

-1.3%

Trade Balance (JAN)

125M

-305M

Employment Change (QoQ) (4Q)

0.4%

-1.0%

The persistent rise in home prices along with the ongoing expansion in private sector credit may become a growing concern with the central bank, and Governor Wheeler may talk up speculation for a rate hike in an effort to balance the risks surrounding the region. However, the weakening outlook for global trade paired with the ongoing slack in the real economy may prompt the RBNZ to adopt a more neutral tone for monetary policy, and we may see the central bank stick to the sidelines throughout 2013 in an effort to encourage a more broad-based recovery.

Potential Price Targets For The Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot065.png, NZD/USD- Trading the Reserve Bank of New Zealand Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

As the NZDUSD consolidates around the 0.8200 figure, the pair appears to be carving out a higher low ahead of the RBNZ interest rate decision, and the fresh batch of central bank rhetoric may trigger a move back above the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 0.8300 should Governor Wheeler talk up bets for a rate hike. As the relative strength index continues to find interim support around the 38 region, we should see a resumption of the bullish trend, and we will maintain a bullish outlook for the New Zealand dollar as the central bank looks to stem the risk for an asset bubble.

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 March, but the fresh batch of central bank rhetoric may instill a bullish outlook for the New Zealand dollar should the central bank adopt a more hawkish tone for monetary policy. Therefore, if Governor Wheeler shows a greater willingness to deliver a rate hike, we will need a green, five-minute candle following the announcement to generate 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 establish 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 persistent slack in the private sector activity paired with slowdown in global trade may push the RBNZ to strike a more balanced tone for monetary policy, and speculation for a neutral stance may spark a sharp selloff in the exchange rate as market participants scale back bets for higher borrowing costs. As a result, if the central bank shows a greater willingness to keep the cash rate at 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)

JAN 2013

1/30/2013 20:00 GMT

2.50%

2.50%

+39

+65

January 2013 Reserve Bank of New Zealand Interest Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot061.png, NZD/USD- Trading the Reserve Bank of New Zealand Rate Decision

Although the Reserve Bank of New Zealand kept the benchmark interest rate at 2.50%, Governor Graeme Wheeler struck a hawkish tone for monetary policy amid the jump in house prices along with the pickup in private sector credit. Indeed, the policy statement pushed the New Zealand dollar higher, with the NZDUSD climbing above the 0.8350 figure, and the higher-yielding currency continued to gain ground throughout the day as the pair closed at 0.8388.

--- 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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