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NZD/USD Risks Further Losses on Bets for Imminent RBNZ Rate-Cut

NZD/USD Risks Further Losses on Bets for Imminent RBNZ Rate-Cut

2016-04-27 17:42:00
David Song, Currency Strategist
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- Reserve Bank of New Zealand (RBNZ) to Hold Official Cash Rate at 2.25%.

- Will Governor Graeme Wheeler Keep the Door Open for Lower Borrowing-Costs?

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

Even though the Reserve Bank of New Zealand (RBNZ) is anticipated to keep the benchmark interest rate on hold at 2.25%, fresh comments from Governor Graeme Wheeler may derail the NZD/USD advance from earlier this year should the central bank head show a greater willingness to implement lower borrowing-costs.

What’s Expected:

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Why Is This Event Important:At the same time, the RBNZ may toughen the verbal intervention on the local currency as the central bank prefers a weaker exchange rate, and the New Zealand dollar may struggle to hold its ground should the central bank highlight a more dovish tilt for monetary policy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (MAR)

401M

117M

Business NZ Purchasing Manager Index- Manufacturing (MAR)

--

54.7

ANZ Business Confidence (MAR)

--

3.2

Waning confidence paired with the slowdown in business outputs may encourage the RBNZ to further embark on its easing cycle in 2016, and market participants may boost bets for another interest-rate cut should the central bank sound increasingly cautious this time around.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index (YoY) (1Q)

0.4%

0.4%

REINZ House Sales (YoY) (MAR)

--

8.2%

Gross Domestic Product (YoY) (4Q)

2.1%

2.3%

However, signs of a more robust recovery accompanied by the pickup in price growth may prompt Governor Wheeler to adopt a more balanced outlook for monetary policy, and a less-dovish policy statement may spur a bullish reaction in the New Zealand dollar as market participants scale back bets for lower borrowing-costs.

How To Trade This Event Risk(Video)

Bearish NZD Trade: Governor Wheeler Pledges to Ease Policy Further

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

Bullish NZD Trade: RBNZ Adopts More Balanced Tone

  • Need green, five-minute candle to favor a long NZD/USD trade.
  • Implement same strategy as the bearish New Zealand dollar trade, just in reverse.

Potential Price Targets For The Release

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • The 2016 advance in NZD/USD may continue to unravel should there be a greater divergence in the policy outlook, while the Relative Strength Index (RSI) struggles to preserve the bullish momentum carried over from earlier this year.
  • Interim Resistance: 0.7050 (78.6% retracement) to 0.7070 (23.6% expansion)
  • Interim Support: 0.6570 (100% expansion) to 0.6590 (38.2% retracement)

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Impact that the RBNZ rate decision has had on NZD/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR

2016

03/09/2016 19:00 GMT

2.50%

2.25%

-136

-120

March 2016 Reserve Bank of New Zealand (RBNZ) Interest Rate Decision

NZD/USD Chart

The Reserve Bank of New Zealand (RBNZ) unexpectedly cut the official cash rate by 25bp in March to 2.25%, with the central bank toughen the verbal intervention on the local currency as ‘the trade-weighted exchange rate is more than 4 percent higher than projected in December.’ As a result, the RBNZ argued that ‘a decline would be appropriate given the weakness in export prices,’ with Governor Graeme Wheeler leaving the door open to implement lower borrowing-costs in order to ‘ensure that future average inflation settles near the middle of the target range.’ The surprise rate-cut dragged on the exchange rate, with NZD/USD slipping below the 0.6700 handle to end the day at 0.6664.

Read More:

US DOLLAR Technical Analysis: Retesting 2016 Lows

EUR/JPY Technical Analysis: The Negative Rate Trend Line is Back

EUR/USD and USD/CHF Outside Weeks at Well-Defined Levels

Big Test For Spoos, Big Test For the Markets

Get our top trading opportunities of 2016 HERE

--- Written by David Song, Currency Analyst

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

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