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NZD/USD at Risk of Knee-Jerk Reaction Amid Bets for RBNZ Rate-Cut

NZD/USD at Risk of Knee-Jerk Reaction Amid Bets for RBNZ Rate-Cut

2016-11-09 15:45:00
David Song, Strategist
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- Reserve Bank of New Zealand (RBNZ) to Cut Official Cash Rate to Fresh Record-Low of 1.75%.

- 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 forecast the Reserve Bank of New Zealand (RBNZ) cut the official cash rate to a fresh record-low of 1.75% as the central bank warns ‘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.’

What’s Expected:

DailyFX Calendar

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Join DailyFX Currency Analyst David Song to Cover the RBNZ Interest Rate Decision!

Why Is This Event Important:

A 25bp rate-cut paired with a dovish policy statement may curb the near-term advance in NZD/USD as it fuels speculation for additional monetary support, but the New Zealand dollar may face a mixed market reaction should the Governor Graeme Wheeler and Co. change its tune for monetary policy. As a result, the near-term resilience in the higher-yielding currency may gather pace throughout the remainder of the year should the RBNZ drop its dovish tone and show a greater willingness to conclude its easing-cycle ahead of 2017.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings (QoQ) (3Q)

1.0%

0.3%

Private Wages ex. Overtime (QoQ) (3Q)

0.4%

0.4%

Trade Balance (NZD) (SEP)

-1.145B

-1.436B

The weakening outlook for global growth accompanied by the ongoing weakness in household earnings may push the RBNZ to further insulate the real economy, and the New Zealand dollar may continue to give back the advance from the previous month should Governor Wheeler preserve a dovish outlook for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (YoY) (3Q)

5.4%

6.1%

Consumer Price Index (YoY) (3Q)

0.1%

0.4%

Gross Domestic Product (YoY) (2Q)

3.6%

3.6%

However,signs of sticky price growth accompanied by the ongoing expansion in employment may encourage the RBNZ to adopt an improved outlook for the region, and the near-term resilience in the higher-yielding currency may gather pace over the remainder of the year should the central bank look to gradually move away from its easing-cycle.

How To Trade This Event Risk(Video)

Bearish NZD Trade: RBNZ Delivers 25bp Rate-Cut, Retains Dovish Outlook

  • Need red, five-minute candle following the rate decision to consider a short NZD/USD position.
  • If market reaction favors a bullish 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: Governor Wheeler Endorses Wait-and-See Approach for 2017

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

Potential Price Targets For The Release

NZD/USD Daily

DailyFX Calendar

Chart - Created Using FXCM Marketscope 2.0

  • Broader outlook for NZD/USD remains constructive as the pair breaks out of the downward trend carried over from back in September, but a failed run at the 2016-high (0.7485) may produce range-bound conditions over the remainder of the year especially as the Relative Strength Index (RSI) appears to be diverging with price; may see the RBNZ spark a ‘buy the rumor, sell the news’ type of reaction should Governor Wheeler and Co. highlight a shift in the monetary policy outlook.
  • Interim Resistance: 0.7515 (50% retracement) to 0.7530 (78.6% retracement)
  • Interim Support: 0.6950 (38.2% retracement) to 0.6970 (50% retracement)

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)

SEP

2016

09/21/2016 21:00 GMT

2.00%

2.00%

+5

-28

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

NZD/USD 5-Minute

NZD/USD Chart

The Reserve Bank of New Zealand (RBNZ) held the official cash rate at the record-low of 2.00% in September, but continued to endorse a dovish outlook for monetary policy as the central bank warned 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.’ In turn, Governor Graeme Wheeler and Co. may implement lower borrowing-costs at the last-2016 policy meeting on December 10, but the RBNZ may change its tune going into the year ahead as the central bank appears to be approaching the end of its easing-cycle. The New Zealand dollar struggled to hold its ground as the RBNZ kept the door open to further support the real economy, with NZD/USD pulling back from 0.7370 to end the day at 0.7310.

Get our top trading opportunities of 2016 HERE

Read More:

US Dollar, Asian Stocks Rise as FBI Clears Clinton Again

Was the EUR/USD Drop a Trap?

Crude Oil Price Forecast: Expect An Important Move Off 200-DMA

Technical Focus: Copper Changing Color

--- Written by David Song, Currency Analyst

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

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