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NZD/USD Risks Near-Term Selloff on Prolonged RBNZ Easing-Cycle

NZD/USD Risks Near-Term Selloff on Prolonged RBNZ Easing-Cycle

David Song, Strategist

- Reserve Bank of New Zealand (RBNZ) to Reduce Official Cash Rate at 2.00%.

- Will Governor Graeme Wheeler Endorse a Series of Rate-Cuts?

For more updates, sign up for David's e-mail distribution list.

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

According to a Bloomberg News survey, all of the 16 economists polled forecast the Reserve Bank of New Zealand (RBNZ) to lower the benchmark interest rate to a fresh record-low of 2.00% in August, and NZD/USD stands at risk of giving back the advance from earlier this year should the central bank endorse a series of rate-cuts.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:With the RBNZ putting greater emphasis on the exchange rate, Governor Graeme Wheeler may increase his efforts to weaken the New Zealand dollar as ‘the trade-weighted exchange rate is 6 percent higher than assumed,’ and the central bank may talk up expectations for lower borrowing-costs as ‘headline inflation is being held below the target band by continuing negative tradables inflation.’

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Private Wages ex. Overtime (QoQ) (2Q)

0.5%

0.4%

Trade Balance (JUN)

150M

127M

Consumer Price Index (YoY) (2Q)

0.5%

0.4%

Subdued wage growth accompanied by the weakening outlook for global growth may push the RBNZ to further support the real economy, and the New Zealand dollar may face heavy selling pressures over the coming months should the central bank deliver a 25bp rate-cut paired with a dovish outlook for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Building Permits (MoM) (JUN)

--

16.3%

QV House Price (YoY) (JUL)

--

14.1%

Gross Domestic Product (YoY) (1Q)

2.6%

2.8%

However, with market expectations already heavily tilted towards a rate-cut, NZD/USD may face a knee-jerk reaction should the RBNZ stick with the status quo and endorse a wait-and-see approach for the foreseeable future.

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
  • Despite the threat of a head-and-shoulders top, NZD/USD may extend the advance from earlier this week and work its way back towards the 2016 high (0.7324) should the RBNZ soften its dovish outlook for monetary policy.
  • Key Resistance: 0.7330 (38.2% retracement) to 0.7340 (61.8% expansion)
  • Interim Support: 0.6560 (23.6% retracement) to 0.6570 (100% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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)

JUN

2016

06/08/2016 21:00 GMT

2.25%

2.25%

+74

+88

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

NZD/USD Chart

The Reserve Bank of New Zealand (RBNZ) kept the official cash rate unchanged at 2.25% in June, but endorsed a dovish outlook for monetary policy, with the central bank warning ‘further policy easing may be required to ensure that future average inflation settles near the middle of the target range.’ Nevertheless, it seems as though Governor Graeme Wheeler will preserve the current policy for the foreseeable future as the central bank anticipates ‘inflation to strengthen reflecting the accommodative stance of monetary policy,’ but the RBNZ may reestablish its easing cycle over the coming months as should the data prints coming out of the region fail to meet central bank expectations. The New Zealand dollar gained ground following the rate-decision, with the NZD/USD advancing from 0.7012 to end the day at 0.7100.

Get our top trading opportunities of 2016 HERE

Read More:

COT-Record British Pound Ownership Profile

GBP/JPY Technical Analysis: Tug-of-War at the ’Brexit-Low’

WTI Crude Oil Price Forecast: Bear Market Prompts OPEC Meeting

Weekly Technicals: NZD/USD - Bye Bye Birdie

--- 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.

https://www.fxcm.com/advantages/mini-account/forex-trading-contest/?utm_source=DailyFX&utm_medium=Song&utm_campaign=Article

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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