NZD/USD: Trading the Reserve Bank of New Zealand Interest Rate Decision

The Reserve Bank of New Zealand is widely expected to hold the benchmark interest rate steady at the record-low of 2.50% this week as the Treasury Department anticipates the $128B economy to emerge from the recession in the fourth quarter of this year, led by a rebound in business confidence.

[U][B]Trading the News: Reserve Bank of New Zealand Interest Rate Decision[/B][/U]

[U][B]What’s Expected[/B][/U]
Time of release: [B]06/11/2009 21:00GMT, 17:00 EST
[/B]Primary Pair Impact : [B] NZDUSD[/B]
Expected: 2.50%
Previous: 2.50%

[U][B]Impact the RBNZ Interest Rate Decision has had on NZDUSD through the last 2 meeting
[/B][/U] [B]Period[/B]

                                   [B]Data Released[/B]

                                   [B]Estimate[/B]

                                   [B]Actual[/B]

                                   [B]Pips Change[/B]

         [B](1 Hour post event )[/B]

                                   [B]Pips Change[/B]

         [B](End of Day post event)[/B]

                                                     Apr 2009

                                   04/29/2009 21:00 GMT

                                   2.50%

                                   [B]2.50%[/B]

                                   -29

                                   -8

                                                     Mar 2008

                                   03/11/2009 20:00 GMT

                                   2.75%

                                   [B]3.00%[/B]

                                   +22

                                   +18

                         [U]April 2009 RBNZ Interest Rate Decision[/U]

                        The New Zealand central bank cut the cash rate by another 50bp to a fresh record-low of 2.50% in April, and the RBNZ went onto say that they ‘expect to keep the cash rate at or below the currently level through until the latter part of 2010’ in an effort to steer the $128B out of its worst recession in over a quarter century. Moreover, Governor Alan Bollard stated that ‘the cash rate could still move modestly lower over the coming quarters’ as price growth falters, and the central bank head sees ‘it appropriate to provide further policy stimulus’ as global trade condition deteriorate. In addition, the Organization for Economic Cooperation and Development called upon the RBNZ lower rates further in order to stem the downside risks for growth and inflation as Governor Bollard expects the annual rate of unemployment to reach a 10-year high of 6.8% in the first half of 2010.             


[U]March 2009 RBNZ Interest Rate Decision
[/U]

                        The Reserve Bank of New Zealand lowered the benchmark interest rate by 50bp to a record-low of 3.00% in March amid expectations for a 75bp rate cut, and policymakers may continue to take additional steps to shore up the economy as the region faces its worst economic downturn in over a quarter century. Governor Alan Bollard projects economic activity to rebound in the third quarter of this year as the cash rate remains at a ‘very stimulatory’ level however, the central bank head said that borrowing costs ‘could go lower’ as growth prospects deteriorate, but went onto say that a zero interest rate policy ‘would be unlikely, unusually, and would have some undesirable effects’ on the outlook for long-term stability. At the same time, the RBNZ forecasts inflation to grow at an annual rate of 0.7% in the third quarter, which is well below the 1-3% target range held by the central bank, and Governor Bollard is likely to ease policy further in the month ahead as the outlook for growth and inflation falter.             

[B]
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:

                        [U][B]Bullish Scenario:[/B][/U]
         
         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 Euro 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 EURUSD ahead of the data release.             [U][B]Bearish Scenario:[/B][/U]
         
         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 Euro 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 EURUSD ahead of the data release.                               


[B]How To Trade This Event Risk [/B]

The Reserve Bank of New Zealand is widely expected to hold the benchmark interest rate steady at the record-low of 2.50% this week as the Treasury Department anticipates the $128B economy to emerge from the recession in the fourth quarter of this year, led by a rebound in business confidence. However, the central bank may take additional steps to stem the downside risks for growth and inflation as businesses face fading demands from home and abroad, and firms may continue to scale back on production and employment throughout the second half of the year as growth prospects deteriorate. A Bloomberg News survey shows 6 of the 11 economists polled forecast the RBNZ to hold the cash rate steady this month, and projects the central bank to adopt a wait-and-see approach as businesses confidence improves. At the same time, a report by Statistics New Zealand showed household spending slumped for the sixth consecutive quarter during the three-months through March to mark its worst slump on record, while a separate report showed employment plunged 1.1% during the first quarter to mark the biggest contraction since 1989, and the data reinforces a weakening private consumption as households face a weakening labor market paired with falling home prices. Meanwhile, inflation expectations slipped to an annual rate of 2.2% in the second quarter, while producer price unexpectedly fell 1.4% in the fourth quarter, and the downside risks for price growth could lead the central bank to take additional steps in an effort to stem the risks for deflation. Nevertheless, RBNZ Governor Alan Bollard signaled that the board is willing to lower the interest rate further during an interview this week, and went onto say that they are prepared to take further steps if ‘monetary policy wasn’t having its normal orthodox impact’ to stimulate the economy. As the central bank maintains a 2-3% target range for price growth and holds a dovish outlook for inflation, easing price pressure could lead Governor Bollard to take additional steps to jump-start the ailing economy, and an unexpected rate could is likely to weigh on the exchange rate as investors weigh the outlook for future policy.

Trading the given event favors a bullish outlook for the New Zealand dollar as market participants forecast the RBNZ to hold the benchmark interest rate steady at the record-low, and price action following the rate decision could set the stage for a long kiwi trade. Therefore, if the central bank attempts to put a floor on the exchange rate, and holds the cash rate steady at 2.50%, we will look for a green, five-minute candle following the release 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 taking volatility into account, and this risk will determine our first target. Our second target 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 preserve our profits.

In contrast, deteriorating trade condition paired with the dour outlook for inflation could lead the RBNZ to surprise the markets with a rate cut as the central bank attempts to jump-start the ailing economy. As a result, if the board unexpectedly lowered the benchmark interest rate 25bp or more, we will look to sell the NZD/USD, and will follow the same strategy for a short kiwi-dollar trade as the long position listed above.