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NZD/USD Bearish Outlook Susceptible to End of RBNZ Easing Cycle

NZD/USD Bearish Outlook Susceptible to End of RBNZ Easing Cycle

2015-12-09 16:55:00
David Song, Shuyang Ren,
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- Reserve Bank of New Zealand to Reduce Cash Rate to Record-Low of 2.50%.

- Will Governor Graeme Wheeler Keep the Door Open for Additional Monetary Easing?

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

According to a Bloomberg News survey, only 15 of the 18 economists polled forecasts the Reserve Bank of New Zealand (RBNZ) to cut the benchmark interest rate to 2.50% but, the market reaction may not be clear cut should Governor Graeme Wheeler signal an imminent end to the easing cycle.

What’s Expected:

NZD/USD RBNZ

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Why Is This Event Important:

The RBNZ may sound less-dovish this time around as the previous rate-cuts work their way through the real economy, and the New Zealand dollar may continue to recoup the losses from earlier this year should the central bank adopt an improved outlook for the region and show a greater willingness to shift gears over the medium to long-term horizon.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Private Wage ex Overtime (QoQ) (3Q)

0.5%

0.4%

Employment Change (QoQ) (3Q)

0.4%

-0.4%

Gross Domestic Product s.a. (QoQ) (2Q)

0.6%

0.4%

The weakening outlook for global growth accompanied by the slowdown in employment may encourage RBNZ Governor Wheeler to further insulate the real economy, and the local currency stands at risk of facing additional headwinds in 2016 should the central bank .

Risk: Bullish Argument/Scenario

Release

Expected

Actual

ANZ Business Confidence (NOV)

--

14.6

Retail Sales ex Inflation (QoQ) (3Q)

1.4%

1.6%

Consumer Price Index (YoY) (3Q)

0.3%

0.4%

However, the RBNZ may look to conclude its easing cycle amid improving demand from home and abroad, and the New Zealand dollar may face a larger correction in the days ahead should the central bank endorse a wait-and-see approach.

How To Trade This Event Risk(Video)

Bearish NZD Trade: RBNZ Cuts & Keeps Door Open for Lower Rates

  • Need red, five-minute candle following the rate decision for a potential short NZD/USD trade.
  • If market reaction favors a bearish aussie trade, sell NZD/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bullish NZD Trade: Governor Wheeler Suggests End of Easing Cycle is Near

  • Need green, five-minute candle to consider a long NZD/USD position.
  • Carry out the same setup as the bearish aussie trade, just in reverse.

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Potential Price Targets For The Release

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • More of the same from the RBNZ may keep NZD/USD within the wedge/triangle formation from September especially as the Relative Strength Index (RSI) preserves the near-term bullish formation but, the long-term outlook remains tilted to the downside amid the deviating paths for monetary policy.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short NZD/USD since November 18, but the ratio appears to be approach its recent extremes ahead of the RBNZ as it slips to -1.48, with 48% of traders now long.
  • Interim Resistance: 0.6890 (50% expansion) to 0.6900 (100% expansion)
  • Interim Support: 0.6400 (61.8% retracement) to 0.6440 (23.6% retracement)

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 2015

10/28/2014 20:00 GMT

2.75%

2.75%

+40

+16

October 2015 Reserve Bank of New Zealand (RBNZ) Interest Rate Decision

NZD/USD Chart

The Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at the record-low of 2.75% in October as the previous rate-cuts continue to work their way through the real economy. Even though Governor Graeme Wheeler keeps the door open to implement lower borrowing-costs, it seems as though the RBNZ appears to be getting a step closer to the end of its easing cycle as the central bank softens the verbal intervention on the local currency. Even though the RBNZ largely retained a dovish outlook for monetary policy, NZD/USD quickly bounced back from the 0.6620 region to close the day at 0.6676.

*As we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

Three Factors Warn of Perfect Storm in FX Markets - Caution Advised

Read More:

Price & Time: NZD/USD – Moment of Truth Awaits

COT-Small British Pound Traders are Most Short Since April Low

WTI Crude Oil Price Forecast: New Lows on No Production Cut & Strong USD

Webinar: USD Setups in Focus as NFP Clears the Way for Fed Hike

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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