The Reserve Bank of New Zealand is widely anticipated to keep the benchmark interest rate at 2.50% in July as policymakers expect an economic recovery later this year, and expectations for higher borrowing costs may drive the exchange rate higher as market participants forecast 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]07/29/2009[/B][B] 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
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[U]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 policymakers 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 it 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.
[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.
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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 anticipated to keep the benchmark interest rate at 2.50% in July as policymakers expect an economic recovery later this year, and expectations for higher borrowing costs may drive the exchange rate higher as market participants forecast the central bank to tighten policy over the next 12 months. A Bloomberg News survey shows all of the 10 economists polled project the RBNZ to keep the cash rate at the record-low for the second consecutive month, while Credit Suisse overnight index swaps are up 94.0 basis points, and the rise in the interest rate outlook may continue to support the rally in the New Zealand dollar as market sentiment improves. Moreover, central bank Governor Alan Bollard anticipates the economy to emerge from the recession later this year and forecasts GDP to expand at an annual pace of 3.2% in 2010, and the RBNZ may continue to hold a neutral policy stance going forward as growth prospects improve. At the same time, Mr. Bollard argued that the recent appreciation in the exchange rate could hamper the prospects for an ‘export-led’ recovery, and warned that the rebound in economic activity is likely to be ‘slow and drawn out’ as the outlook for global trade remains bleak. The central bank head went onto say that further rate cuts may not be able to temper the appreciation in nation’s currency as ‘market forces’ drive volatility in the exchange rate, and noted that the kiwi needs to be ‘persistently weak’ in order to support foreign demands and investments. Nevertheless, as the bank projects consumer prices to grow at an annual rate of 2.2% over the next two-years, policymakers may continue to hold a dovish outlook for future policy and is widely expected ‘to keep the cash rate at or below the current level through until the latter part of 2010’ in an effort to support a sustainable recovery. As a result, fears of a slower recovery could lead the central bank to take additional steps to stem the downside risks for growth and inflation, and speculation for further easing may drag the exchange rate lower over the near-term. Meanwhile, as risk trends continue to dictate price action in the currency market, a rise in risk appetite could drive the New Zealand dollar higher as participants move into higher risk/reward investments.
Trading the given event risk favors a bullish outlook for the New Zealand dollar as market participants anticipate the RBNZ to maintain the floor on the interest, and price action following the rate decision could set the stage for a long kiwi trade. Therefore, if the central bank keeps the cash rate at 2.50% and holds an improved outlook for future growth, we will look for a green, five-minute candle following the release to trigger a long 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 establish our first objective. 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 an effort to preserve our profits.
On the other hand, fears of a protracted downturn paired with the slump in global trade may lead the RBNZ to curb their outlook for growth and inflation, and dovish commentary following the policy meeting is likely to drag on the exchange rate as investors weigh the outlook for future policy. As a result, if the central bank surprises the markets with an unexpected rate cut or continues to see scope for lower borrowing costs over the near-term, we will favor a bearish outlook for the higher-yielding currency, and will follow the same strategy for a short kiwi-dollar trade as the long position mentioned above, just in reverse. </p>
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