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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: 04/23/2013 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 (RBNZ) is widely expected to keep the benchmark interest rate at 2.50% in April, but the statement accompanying the rate decision may shake up the New Zealand dollar as market participants weigh the outlook for monetary policy. Although Governor Graeme Wheeler struck a rather mixed tone last time around, the positive developments coming out of the region may encourage the central bank head to sound more upbeat this time around, and the RBNZ may show a greater willingness to start normalizing monetary policy later this year in an effort to stem the risk of an asset bubble.

Recent Economic Developments

The Upside

Release

Expected

Actual

REINZ House Sales (YoY) (MAR)

--

10.9%

QV House Prices (YoY) (MAR)

--

6.5%

Gross Domestic Product (QoQ) (4Q)

0.9%

1.5%

The Downside

Release

Expected

Actual

Consumer Prices (YoY) (1Q)

0.9%

0.9%

Business NZ Purchasing Manager Index (MAR)

--

53.4

Manufacturing Activity (4Q)

--

0.0%

Heightening home prices along with the marked expansion in economic activity may prompt the RBNZ to adopt a more hawkish tone for monetary policy, and Governor Wheeler may scale back his dovish tone for monetary policy as the rebuilding effort from the Christchurch earthquake raises the outlook for growth and inflation. However, the slowdown in business outputs along with subdued price growth may encourage the central bank to retain its wait-and-see approach throughout 2013, and Mr. Wheeler may make another attempt to talk down the New Zealand dollar as the persistent strength in the local currency drags on the economy.

Potential Price Targets For The Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot178.png, NZD/USD- Trading the Reserve Bank of New Zealand Rate Decision

Daily Chart - Created Using FXCM Marketscope 2.0

As the NZDUSD appears to be carving a higher low around the 0.8400 region, we may see the upward trending channel continue to take shape over the near to medium-term, and pair may finally fill-in the gap from the 4/15 open, and the New Zealand dollar may make another run at the 0.8700 figure should the central bank highlight an improved outlook for the region. However, a mixed policy statement from Governor Wheeler may drag on the exchange rate, and we may see the NZDUSD fall back towards the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 0.8300 as it searches for support.

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 preserve its current policy stance 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 sees scope to normalize policy later this year, 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 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 hits its mark in order to preserve our profits.

On the other hand, the persistent slack in the private sector activity paired with subdued price pressures may encourage the RBNZ to strike a more balanced tone for monetary policy, and speculation for a neutral stance may drag on the exchange rate as market participants raise bets for lower borrowing costs. As a result, if the central bank shows a greater willingness to keep the cash rate at 2.50% or to introduce another rate cut, 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)

MAR 2013

03/13/2013 20:00 GMT

2.50%

2.50%

-80

-48

March 2013 Reserve Bank of New Zealand Interest Rate Decision

Forex_NZDUSD-_Trading_the_Reserve_Bank_of_New_Zealand_Rate_Decision_body_ScreenShot174.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 very mixed tone for monetary policy, and pledged to ‘keep the official cash rate unchanged through the end of the year’ as the drought dampens the outlook for growth. Indeed, the more dovish commentary from Governor Wheeler dragged on the New Zealand dollar, with the NZDUSD slipping below the 0.8200 region, but we saw the higher-yielding currency consolidate throughout the day as the pair closed at 0.8218.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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