The Reserve Bank of New Zealand is widely expected to hold the official cash rate at 2.50% in September as policy makers anticipate economic activity to improve throughout the second-half of the year, the rise in the interest rate outlook may drive the exchange rate higher over the near-term as investors anticipate the central bank to tighten policy over the next 12-months.
[B][U]Trading the News: Reserve Bank of New Zealand Interest Rate Decision[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/09/2009 21:00GMT, 17:00 EST[/B]
Primary Pair Impact[B] : NZDUSD[/B]
Expected: 2.50%
Previous: 2.50%
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[B][U]Impact the RBNZ Interest Rate Decision has had on NZDUSD through the last 2 meeting[/U][/B]
[U]July 2009 RBNZ Interest Rate Decision[/U]
The New Zealand central bank left borrowing costs unchanged at 2.50% for the second consecutive month in July and is likely to maintain a neutral policy stance going forward as policy makers anticipate economic activity to expand throughout the second half of the year. At the same time, Reserve Bank of New Zealand Governor Alan Bollard stated that “the forecast recovery is based on a further easing in financial conditions” and went on to say that the key rate “could still move modestly lower over the coming quarters” as they see a risk for a slower recovery. Moreover, Finance Minister Bill English said that the exchange rate remains “higher than fundamentals warrant” after pressing the RBNZ to lower rates further, and the appreciation in the New Zealand dollar may continue to weigh on the economic outlook as global trade conditions remain subdued.
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June 2009 RBNZ Interest Rate Decision[/U]
The Reserve Bank of New Zealand held the benchmark interest at the record-low of 2.50% in June as policy makers expect economic activity to expand later this year, but went onto say that ‘the recovery is likely to be slow and fragile’ as global trade conditions falter. Moreover, the central bank stated that the cash rate is likely to stay at its current level for ‘some time,’ with the central bank head reiterating that ‘the rate could still move modestly lower over the coming quarters’ as the outlook for growth and inflation remains weak. At the same time, Governor Alan Bollard argued that the recent appreciation in Australian dollar could hamper the prospects for an ‘export-led recovery,’ and policymakers may take further steps to soften the landing of the ailing economy as the outlook for future growth remains uncertain.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on NZDUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the NZD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on NZDUSD ahead of the data release.
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How To Trade This Event Risk[/B]
The Reserve Bank of New Zealand is widely expected to hold the official cash rate at 2.50% in September as policy makers anticipate economic activity to improve throughout the second-half of the year, the rise in the interest rate outlook may drive the exchange rate higher over the near-term as investors anticipate the central bank to tighten policy over the next 12-months. A Bloomberg News survey shows 12 of the 13 economists polled forecast the RBNZ to hold borrowing costs at 2.50%, while Credit Suisse overnight index swaps are up 100bp in September, and hawkish commentary following the rate decision is likely to stoke long-term expectations for higher interest rates as Governor Alan Bollard anticipates price growth to hold within the 1-3% target range for inflation going forward. At the same time, the central bank head saw a risk for a slower rebound in economic activity as the appreciation in the exchange rate hampers the prospects for an ‘export-led recovery,’ and the board may hold a dovish policy stance going into the following year as Mr. Bollard pledges to “keep the cash rate at or below the current level through until the latter part of 2010.” Moreover, Finance Minister Bill English said that the current exchange rate “appears to be out of line with New Zealand’s fundamentals” as he anticipates borrowing costs to hold steady “over the next six months or so,” and policy makers may take additional steps to foster a sustainable recovery as the outlook for global growth remains far from favorable. As a result, the Group of 20 pledged to maintain the expansion in fiscal and monetary policy over the weekend as prospects for a global recovery remains highly uncertain, and the RBNZ may hold a cautious tone over the coming months as the rise in the exchange rate continues to hinder the competitiveness of New Zealand exports. Nevertheless, the NZD/USD rallied for the fourth consecutive day and surged to a fresh yearly high of 0.6985 following the rise in risk appetite, and the pair may continue to trend higher to retrace the sell-off from the previous year as market sentiment improves. However, as the pair approaches overbought territory (RSI @ 66), we may see the kiwi-dollar hold a narrow range over the next 24 hours of trading as investors weigh the outlook for future policy.
Trading the given event risk favors a bullish outlook for the New Zealand dollar as market participants anticipate the RBNZ to hold the benchmark interest rate at 2.50% for the third meeting, and price action following the release could set the stage for a long kiwi-dollar trade as policy makers hold an improved outlook for growth and inflation. Therefore, if the central bank adopts a wait-and-see approach and expects an economic recovery later this year, we will look for a green, five-minute candle following the rate decision to confirm a buy entry on two-lots of NZD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.
On the other hand, fears of a slower recovery paired with the slump in global trade may lead the central bank to take additional steps to shore up the $128B economy, and dovish rhetoric following the rate decision may lead the NZD/USD to retrace the September rally as market participants scale back expectations for higher interest rates. As a result, if the RBNZ surprises the markets with a 25bp rate cut or leaves the door open for lower borrowing costs, we will favor a bearish outlook for the New Zealand dollar, and will following the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse.</p>
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