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According to a surge in NZDUSD overnight implied volatility – which now sits at 21.5 percent – spot prices are expected to be the most active since August 2016. The recent rip higher in the US Dollar owing to a relatively hawkish tilt from the Fed meeting last week has been exacerbated by weakness in comparably ‘riskier’ currencies like the New Zealand Dollar.

Meanwhile, soft NZ economic data and dovish commentary from the Reserve Bank of New Zealand (RBNZ) has led to OIS futures pricing a 40 percent chance that the central bank lowers its Overnight Cash Rate (OCR) by 25 basis points at its meeting from ithe current level of 1.75 percent.


Forex market volatility NZDUSDCurrency market volatility NZD USD AUD JPY EUR GBP CHF CAD

Looking to other NZD currency crosses, forex traders might shift their focus to AUDNZD or NZDJPY. In fact, the respective overnight implied volatility measures have skyrocketed to their highest readings since October 2017 and November 2016.

With spot AUDNZD treading water in the wake of the RBA meeting early Tuesday, the RBNZ could further stir price action when it announces its own decision regardless of the outcome due to split market expectations. The RBNZ press statement is slated for release at 2:00 GMT during Wednesday's session.


AUDNZD Price Chart Ahead of RBNZ

With an implied volatility of 14.91 percent, AUDNZD might be expected to trade between 1.0542 and 1.0708 with a 68 percent statistical probability. This 1 standard deviation band surrounding spot prices roughly aligns with its 1 month trading range. However, resistance from its bear trend appears where today’s gain in the Aussie halted. If the RBNZ cuts rates tomorrow, AUDNZD could quickly break through this level and potentially target the 1.0700 handle.

Conversely, a firm RBNZ may reverse recent advances in the currency pair. Further, language from Governor Orr is expected to provide context of the central bank’s relatively hawkish or dovish position which traders will contrast against the latest RBA decision.


NZDJPY Price Chart Ahead of RBNZ

The New Zealand Dollar has come under considerable downward pressure recently – particularly against the Japanese Yen. The latest bit of weakness in the Kiwi could be attributed to the flareup in trade tension between the US and China seeing that China is the biggest importer of New Zealand’s goods. This escalation in trade wars from Trump's tariffs could potentially be labeled as a contributing factor to the RBNZ’s decision if the central bank does in fact lower its OCR tomorrow, which will likely weigh on the NZD.

That being said, currency traders seem to expect NZDJPY to trade between 71.836 and 73.673 tomorrow – with the RBNZ again dictating the direction of price action – as calculated from an overnight implied volatility of 24.1 percent with a 68 percent statistical probability. If RBNZ stands pat on rates, NZDJPY could retest resistance at the 38.2 percent Fibonacci retracement line drawn from the high in December 2018 and JPY flash crash low in January earlier this year. On the other hand, a dovish RBNZ might send NZDJPY to the 72.000 handle where the 23.6 percent Fibonacci line could provide a level of support.


Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter