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Kiwi Poses a Rate-Cut Rally: NZD/USD Bid as RBNZ Cuts Rates

Kiwi Poses a Rate-Cut Rally: NZD/USD Bid as RBNZ Cuts Rates

2016-08-11 13:30:00
James Stanley, Currency Strategist
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Talking Points:

- This week presents a light economic calendar, with one of the few high-impact announcements coming from the Reserve Bank of New Zealand when the bank cut rates at last night’s meeting.

- Despite this rate cut and this dovish stance from the RBNZ, NZD/USD has continued to rally, setting another fresh yearly high on the back of last night’s rate cut.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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Many major markets are continuing to trade with ‘summer-lull’ like price action, and given the light data calendar after two weeks of excitement, combined with the start of the Summer Olympics, this is somewhat understandable. One of the few high-impact items on the docket for this week was delivered last night, and brought an interesting response into FX markets.

This was the Reserve Bank of New Zealand rate decision, and of recent New Zealand rate expectations have been all-over-the place. Just in June, the RBNZ extinguished rate-cut hopes after saying that they were fearful of bubbles building in real estate, particularly in Auckland. This implied that the bank was cognizant of the rampant increases in home prices being seen by New Zealanders, and in the effort of keeping home prices relatively affordable, the bank said that they would begin to turn their focus towards ‘macro-prudential’ monetary policy. This also carried the implication that the RBNZ likely wouldn’t be cutting rates anytime soon as that may only serve to put even more ‘air’ into the ‘bubbles’ being seen in New Zealand real estate.

And this was fresh on the heels of a meeting in March that saw the bank pose a surprise rate-cut while also saying that further easing may be required, depressing spot prices in NZD as investors ramped up bets for looser monetary policy down-the-road. But when no cut was delivered in April, investors began to sell-out of RBNZ rate-cut bets and the Kiwi flew higher (pun intended). And then when the bank held rates at their meeting in June while also steering focus to macro-prudential policy, those hopes for a rate cut diminished even further.

For all of this jostling, with the RBNZ first going super-dovish in March and then getting considerably more hawkish in June, NZD/USD has simply rallied up to a new annual high. Governor Graeme Wheeler is remarkably open about his opinion on Kiwi spot rates, and he’s mentioned numerous times in the past his willingness to mold rate policy based on exchange rates, despite the assertion that policy is not being used to directly target rates. So as NZD/USD rallied up to a fresh one-year high ahead of the bank’s July meeting, we saw, yet again, another turn in the stance of the RBNZ. In July, the bank released their economic assessment and this indicated that further easing would be required while setting the stage for an August rate cut.

So going into last night, expectations were extremely high to see a rate cut, with market expectations running as high as 99% for such a move. The bigger question was whether the RBNZ might stage a 50 basis point cut rather than the more traditional 25. There was an approximate 8% probability of such a move yesterday just ahead of the RBNZ, and this was even addressed by Mr. Wheeler who said that this option was never really under serious consideration.

For all of this work, the RBNZ is now seeing a stronger Kiwi as last night’s rate cut merely propelled price action to fresh yearly highs. This is a good example of a situation in which an expectation is so ‘baked in’ to prices that the delivery of said expectation fails to bring the desired impact. But there’s another piece to this equation, and this speaks to a ‘larger, more global’ theme that the Fed will likely be encountering in the coming months; and that’s the prospect of policy divergence amongst the Fed and the rest of the world. The US Dollar has been extremely weak of recent as investors have continued to sell-out of U.S. rate hike bets, and this is likely a larger culprit of the top-side extension being seen of recent in Kiwi-Dollar spot rates.

Last night’s price action saw an extremely interesting level of resistance come-in to NZD/USD. The prior swing high from July was at .7324, and last night’s rip broke-above that level, albeit barely. Just a little above that prior batch of price action resistance is a confluent zone of Fibonacci interest. The price of .7332 is the 38.2% Fibonacci retracement of the ‘post-Financial Collapse move,’ taking the 2009 low to the 2011 high. And at .7329 is a 61.8% extension of a well-defined major move, taking the August 2015 low to the October 2015 high. Also in this vicinity is a projected trend-line that can be found by projecting a trend-line from the lows on 9/23/2015 to 11/18/2015.

Kiwi Poses a Rate-Cut Rally: NZD/USD Bid as RBNZ Cuts Rates

Created with Marketscope/Trading Station II; prepared by James Stanley

This is a resistance level that traders may not want to directly sell against. Given the veracity of the up-trend in NZD/USD in an environment that’s seen the representative Central Bank make numerous dovish moves, including multiple rate cuts, traders would want to check their bearishness as price action simply isn’t reflecting that at the moment. If the US Dollar can move back into its own bullish state, perhaps the door for bearish-Kiwi plays could open-up; but from where the chart is at the present, most technical indications are all bullish in nature: Don’t fight the trend.

Instead, this resistance can become a top-side target for bullish approaches in the coming days should support build at a ‘higher-low.’

--- Written by James Stanley, Analyst for DailyFX.com

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