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RBNZ Preview: 25bp Rate Cut and Dovish Guidance to Drag on NZD/USD

RBNZ Preview: 25bp Rate Cut and Dovish Guidance to Drag on NZD/USD

David Song, Strategist

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

The Reserve Bank of New Zealand (RBNZ) interest rate decision may fuel the recent decline in NZD/USD as the central bank is expected to reduce the official cash rate (OCR) to a fresh record low of 0.75% in November.

Image of DailyFX economic calendar

The RBNZ may further embark on its rate easing cycle at its last meeting for 2019 as Deputy GovernorGeoff Bascand reveals that “the Reserve Bank is undertaking further preparatory work on less conventional monetary policy tools.”

The comments suggest Governor Adrian Orr and Co. will continue to push monetary policy into uncharted territory as the central bank reiterates that “there remains scope for more fiscal and monetary stimulus if necessary. In turn, a 25bp rate cut along with a dovish forward guidance may keep NZD/USD under pressure especially as the Federal Reserve appears to be on track to retain the current policy throughout the remainder of the year.

However, the New Zealand Institute of Economic Research (NZIER) Policy Shadow Board has called “for the OCR to be kept on hold” following the 50bp reduction in August, and more of the same from the RBNZ may curb the recent decline in NZD/USD as the central bank insists “low interest rates and increased government spending are expected to support a pick-up in domestic demand over the coming year.

Impact that the RBNZ interest rate decision 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

2019

09/25/2019 02:00:00 GMT

1.00%

1.00%

+41

-36

September 2019 Reserve Bank of New Zealand (RBNZ) Interest Rate Decision

NZD/USD 5-Minute Chart

Image of NZD/USD 5 minute chart

Source: Trading View

The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) at the record low of 1.00% in September, with the central bank stating that “new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook.

The RBNZ appears to be in a wait-and-see mode as “the Committee discussed the long and variable lags between monetary policy decisions and outcomes,” but Governor Adrian Orr and Co. may continue to support the economy over the coming months as the central bank insists that “there remains scope for more fiscal and monetarystimulus.

The New Zealand Dollar gained ground following the RBNZ rate decision, with NZD/USD climbing to a session high of 0.6349, but the reaction was short lived as the exchange rate closed the day at 0.6269. Learn more with the DailyFX Advanced Guide for Trading the News.

NZD/USD Rate Daily Chart

Image of NZD/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for NZD/USD remains tilted to the downside as the exchange rate trades to a fresh yearly-low (0.6204) in October.
  • However, failure to break/close below the Fibonacci overlap around 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) has spurred a near-term correction in the exchange rate.
  • With that said, the lack of momentum to test the former-support zone around 0.6490 (50% expansion) to 0.6520 (100% expansion) suggests the correction is nearing an end especially as the Relative Strength Index (RSI) snaps the bullish formation carried over from September.
  • As a result, the string of failed attempts to close above the overlap around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion) brings the downside targets on the radar, but need a break/close below the 0.6310 (100% expansion) region to open up the 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) area.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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