TheNews

- RBNZ Expected to Retain Current Policy Amid Period of ‘Interest Rate Stability’.
- Will RBNZ Governor Graeme Wheeler Remove the Verbal Intervention on Kiwi?

Trading the News: Reserve Bank of New Zealand (RBNZ) Rate Decision

According to a Bloomberg News survey, all of the 13 economist polled see the Reserve Bank of New Zealand (RBNZ) keeping the interest rate on hold at 3.50%, but the fresh batch of central bank rhetoric may produce increased volatility in the NZD/USD as market participants weigh the outlook for monetary policy.

What’s Expected:



Why Is This Event Important:

In light of the marked depreciation in the NZD/USD, the biggest risk for surprise will be a removal of the verbal intervention on the kiwi, and a further decline in the exchange rate may prompt Governor Graeme Wheeler to adopt a more hawkish tone for monetary policy as it fuels imported inflation.

Expectations: Bearish Argument/Scenario

Release	Expected	Actual
Manufacturing Activity s.a. (QoQ) (2Q)	--	-1.9%
Employment Change (QoQ) (2Q)	0.7%	0.4%
Consumer Price Index (YoY) (2Q)	1.8%	1.6%

Below-target inflation along with the slowdown in employment may encourage the RBNZ to retain a period of ‘interest rate stability’ in New Zealand, and the fresh batch of central bank rhetoric may spur a further decline in the NZD/USD should it drag on interest rate expectations.

Risk: Bullish Argument/Scenario

Release	Expected	Actual
Value of All Buildings (YoY) (2Q)	0.0%	1.0%
Retail Sales ex Inflation (QoQ) (2Q)	1.0%	1.2%
Private Wages ex Overtime (QoQ) (2Q)	0.5%	0.6%

Nevertheless, the RBNZ may no longer jawbone the kiwi as the lower exchange rate raises the risk for imported inflation, and the NZD/USD may face a more meaningful rebound ahead of the next Fed meeting on September 17 should Governor Wheeler unexpectedly adopt a more hawkish tone for monetary policy.

How To Trade This Event Risk
Bearish NZD Trade: RBNZ Continues Talk Down Interest Rate Expectations

• Need red, five-minute candle following the statement to consider a short New Zealand dollar trade
• If market reaction favors selling kiwi, short NZD/USD with two separate position
• Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
• Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish NZD Trade: Governor Wheeler Removes Verbal Intervention

• Need green, five-minute candle to favor a long NZD/USD trade
• Implement same setup as the bullish New Zealand dollar trade, just in the opposite direction

Potential Price Targets For The Release
NZD/USD Daily

• Will look for fresh highs should the NZD/USD carve a higher-low in July
• Interim Resistance: 0.8430 (23.6% retracement) to 0.8450 (23.6% expansion)
• Interim Support: 0.8160 (100% expansion) to 0.8180 (38.2% retracement)

Impact that the RBNZ rate decision has had on NZD during the last meeting

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
JUL 2014	07/23/2014 21:00 GMT	3.50%	3.50%	-79	-114

As expected, the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) by another 25 pips to 3.50%, marking the fourth consecutive interest rate hike since March 2014. However, the RBNZ revised down the GDP forecast to 3.7% from 4% in June amid falling export prices of diary and timber, and went onto say that there will ‘be a period of assessment before interest rates adjust further towards a more-neutral level’. The NZD/USD was pulled down nearly 90 pips following the shift in the policy outlook, with the pair ending the day at 0.8584.

--- Written by David Song, Currency Analyst and Shuyang Ren


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