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Hawkish Fed, Dovish RBNZ to Fuel Risk for NZD/USD H&S Formation

Hawkish Fed, Dovish RBNZ to Fuel Risk for NZD/USD H&S Formation

2016-09-21 15:30:00
David Song, Strategist
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- Reserve Bank of New Zealand (RBNZ) to Keep Official Cash Rate at Record-Low of 2.00%.

- 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

According to a Bloomberg News survey, all of the 17 economists polled expect the Reserve Bank of New Zealand (RBNZ) to keep the official cash rate at the record-low of 2.00%, but the fresh batch of central bank rhetoric may undermine the resilience in NZD/USD should the central bank cast a dovish outlook for monetary policy.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:Even though the RBNZ sees the real economysupported by strong inward migration, construction activity, tourism, and accommodative monetary policy,’ Governor Graeme Wheeler may keep the door open to further embark on the easing-cycle as the central bank warns the ‘current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Westpac Consumer Confidence (3Q)

--

108.0

Employment Change (QoQ) (2Q)

0.6%

2.4%

Retail Sales ex. Inflation (QoQ) (2Q)

1.0%

2.3%

Improved confidence paired with the pickup in private-sector consumption may encourage the RBNZ adopt a more upbeat outlook for the region, and a material shift in the monetary policy outlook may heighten the appeal of the higher-yielding currency as market participants scale-back bets for additional monetary support.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Balance of Payments- Current Account (2Q)

-0.295B

-0.945B

Trade Balance (JUL)

-325M

-433M

Private Wages ex Overtime (QoQ) (2Q)

0.5%

0.4%

However,Governor Wheeler may prepare New Zealand households and businesses for lower borrowing-costs in an effort to combat the ongoing weakness in private wages accompanied by the slowdown in global trade, and the near-term resilience in kiwi may largely unravel should the central bank talk up bets for another rate-cut in 2016.

How To Trade This Event Risk(Video)

Bullish NZD Trade: RBNZ Endorses Wait-and-See Approach

  • Need green, five-minute candle following the rate decision to consider a long NZD/USD position.
  • If market reaction favors a bullish kiwi trade, buy NZD/USD with two separate position.
  • Set stop at the near-by swing low/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.

Bearish NZD Trade: Governor Wheeler Boosts Bets for Anther Rate-Cut in 2016

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

Potential Price Targets For The Release

NZD/USD Daily

NZD/USD Daily Chart
  • Will retain a constructive outlook for NZD/USD going into the RBNZ policy meeting as the pair preserves the bullish formation from the end of May, but the near-term advance appears to be getting exhausted as the pair struggles to get back above the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7350 (61.8% expansion), with the pair at risk of carving a head-and-shoulders formation; failure to find trendline support in price as well as in the Relative Strength Index (RSI) may spark a larger reversal.
  • Key Resistance: 0.7680 (23.6% retracement) to 0.7700 (50% retracement)
  • Key Support: 0.6950 (38.2% retracement) to 0.6970 (50% retracement)

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)

AUG

2016

08/10/2016 21:00 GMT

2.00%

2.00%

+104

+26

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

NZD/USD 5-Minute

NZD/USD Chart

As expected, the Reserve Bank of New Zealand (RBNZ) cut the benchmark interest rate to a fresh record-low of 2.00% in August, with the central bank warning ‘current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.’ Nevertheless, Governor Graeme Wheeler and Co. went onto say that ‘domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy,’ and it seems as though the RBNZ will avoid back-to-back rate cuts as the central bank pledges to ‘watch closely the emerging economic data’ coming out of the global economy. NZD/USD spiked higher as the RBNZ curbed bets for a string of rate cuts, but the New Zealand dollar struggled to retain the bulk of the advance as the pair ended the day at 0.7206.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500 Tech Update: Looking to Short-term Chart for Direction

Silver Prices: Triangle Morphs into Larger Version of Itself, Wait for the Break

Few US Data Pre-FOMC Keeps Markets on Edge

Weekly Trading Forecast: Fed and BoJ Rate Decisions, Brexit Fears Carry More than Currency Risks

--- Written by David Song, Currency Analyst

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

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

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