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Dovish RBNZ to Curb NZD/USD Rebound- RSI Divergence Takes Shape

Dovish RBNZ to Curb NZD/USD Rebound- RSI Divergence Takes Shape

2017-05-10 15:00:00
David Song, Strategist
Share:

- Reserve Bank of New Zealand (RBNZ) to Keep Cash Rate at Record-Low of 1.75%.

- Will Governor Graeme Wheeler Alter the Outlook Before His Departure in September?

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

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) interest rate decision may spark a limited market reaction as the central bank is widely expected to keep the official cash rate at the record-low of 1.75%, but the New Zealand dollar may struggle to hold its ground should Governor Graeme Wheeler show a greater willingness to further support the economy ahead of his departure in September.

Why Is This Event Important:

The RBNZ may continue to tame market expectations and reiterate ‘monetary policy will remain accommodative for a considerable period’ amid the uncertainty surrounding the global economy, and more of the same from the central bank may spark a similar reaction as the March meeting as Governor Wheeler appears to be in no rush to lift the cash rate from the record-low. Nevertheless, signs of stronger inflation accompanied by the ongoing improvement in the labor market may push the RBNZ to change its tune, and a less-dovish policy statement may generate a bullish reaction in NZD/USD as market participants scale back bets for additional monetary support.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR

2017

03/22/2017 20:00 GMT

1.75%

1.75%

-11

-23

March 2017 Reserve Bank of New Zealand Interest Rate Decision

NZD/USD 10-Minute

NZD/USD Chart

As expected, the Reserve Bank of New Zealand (RBNZ) stuck to the sidelines in March, and it seems as though the central bank remains in no rush to lift the official cash rate off of the record-low as Governor Graeme Wheeler warns ‘monetary policy will remain accommodative for a considerable period.’ The New Zealand dollar struggled to hold its ground as the RBNZ continued to endorse a dovish outlook, with NZD/USD slipping below the 0.7050 region to end the day at 0.7029.

How To Trade This Event Risk(Video)

Bearish NZD Trade: RBNZ Continues to Tame Interest-Rate Expectations

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

  • Need a red, five-minute candle to favor a short kiwi position.
  • Carry out the same setup as the bearish NZD trade, just in the opposite direction.

Potential Price Targets For The Release

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using Trading View

  • Longer-term outlook for NZD/USD remains bearish as price & the Relative Strength Index (RSI) largely retain the downward trends carried over from the previous year, but the lack of momentum to break below the Fibonacci overlap around 0.6820 (23.6% retracement) to 0.6850 (38.2% retracement) raises the risk for a near-term recovery especially as the momentum indicator appears to be deviating with price; despite the lower-low in the exchange rate, a RSI divergence appears to be taking as the oscillator turns around ahead of oversold territory.
  • Interim Resistance: 0.7200 (38.2% retracement) to 0.7240 (61.8% retracement)
  • Interim Support: 0.6820 (23.6% retracement) to 0.6850 (38.2% retracement)

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IG Sentiment

Retail trader data shows 56.2% of traders are net-long NZD/USD with the ratio of traders long to short at 1.28 to 1. The number of traders net-long is 8.7% higher than yesterday and 1.8% lower from last week, while the number of traders net-short is 7.7% lower than yesterday and 8.6% higher from last week.

For More Information on Retail Sentiment, Check Out the New Gauge Developed by DailyFX Based on Trader Positioning

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--- 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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