Monday, 09 March 2009 11:29:42 GMT
Written by David Song, Currency Analyst
Full Article
The Reserve Bank of New Zealand is widely expected to lower the benchmark interest rate by another 75bp to a record-low of 2.75% in an effort to steer the economy out of deepening recession, which is likely to weigh on the exchange rate as policy makers hold a dour outlook for growth and inflation.
Trading the News: Reserve Bank of New Zealand Interest Rate Decision
What’s Expected
Time of release: 03/11/2009 20:00GMT, 16:00 EST
Primary Pair Impact: NZDUSD
Expected: 2.75%
Previous: 3.00%
Impact the Reserve Bank of New Zealand Interest Rate Decision had on NZDUSD through the last 2 months
January 2009 Reserve Bank of New Zealand Interest Rate Decision
The Reserve Bank of New Zealand lowered the benchmark interest rate by another 150bp to a record-low of 3.50%, and is anticipated to lower borrowing costs further as policy makers utilize all of their available tools to pull the economy out of its worst recession in nearly two-decade. Governor Alan Bollard said that the central bank will take ‘a more stimulatory position’ to shore up the economy, and stated that they will move ‘quickly’ to stimulate the ailing economy in order to avoid a deep and prolonged recession throughout the region. Meanwhile, the International Monetary Fund said that they expected the global economy to grow at an annual pace of 0.5% in 2009, which is the lowest level since World War II, and as trade conditions deteriorate, the outlook for the export-driven economy remains bleak. As a result, the RBNZ is expected to hold a dovish outlook going forward, and is likely to cut rates further to avoid a deepening recession.
December 2008 Reserve Bank of New Zealand Interest Rate Decision
RBNZ Governor Alan Bollard and Co. lowered borrowing costs at a record pace in December in an effort to steer the $128B economy out of its worst economic slump in 18 years. The central bank cut the official cash rate by 150bp to 5.00%, which is the biggest reduction since policy makers began using the official cash rate to manage monetary policy in 1999, and is widely expected to reduce the interest rate further as the RBNZ ‘takes monetary policy to an expansionary position.’ Dr. Bollard stated that ‘some further but significantly smaller reductions in interest rate may be warranted’ as the outlook for growth and inflation falter, and went onto say that he expects economic activity to contract 0.2% and forecasts the annual rate of inflation to fall to 1.5% throughout the first-half of the year as the global economy faces its worst financial crisis since the Great Depression.
What To Look For Before The Release
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:
Bullish Scenario:
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.
Bearish Scenario:
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.
How To Trade This Event Risk
The Reserve Bank of New Zealand is widely expected to lower the benchmark interest rate by another 75bp to a record-low of 2.75% in an effort to steer the economy out of deepening recession, which is likely to weigh on the exchange rate as policy makers hold a dour outlook for growth and inflation. A Bloomberg News survey shows that the median forecast held by the 13 economists polled project the RBNZ to lower the cash rate by 75bp this month however, as the $128B economy faces its worst economic slump in nearly two-decades, Governor Alan Bollard may surprise the markets with a larger-than-expected rate cut in order to stimulate the ailing economy. Business confidence in the region fell to -41.2 from -35.0 in January, which is the second-lowest reading on record, and firms are likely to turn increasingly pessimistic towards the economy as demands from home and abroad deteriorate. Retail spending in the fourth quarter slipped another 0.6% after falling 0.9% in the previous quarter to mark its first full-year contraction on record, and conditions are likely to get worse as consumer confidence holds at a 10-year low. Moreover, home sales in January fell 28.5% from the previous year to reach an annual pace of 3,706, which is the lowest level since 1989, and demands for real estate purchases are likely to fall further over the year as households face a weakening labor market. The jobless rate rose to a five-year high of 4.6% in the fourth quarter as firms continued to cutback on employment to reduce costs, and as trade conditions deteriorate, economic activity within the export-driven economy is likely to weaken further throughout the first half of the year. As a result, the RBNZ may continue its easing cycle in the months ahead with the government pushing for additional stimulus to shore up the economy as market participants anticipate the region to face a deepening recession. As the economic docket continues to reinforce fears of a prolonged downturn in the isle-nation, mounting growth concerns paired with a weakening outlook for inflation should continue to drag on the exchange rate, and as investors remain risk adverse, the kiwi is expected to hold its bearish trend against the U.S. dollar as the reserve currency continues to benefit from safe-have flows.
Expectations for a 75bp rate cut by the RBNZ clearly favors a bearish forecast for the given event risk however, if Governor Bollard reinforces his previous statements for ‘significantly smaller reductions in interest rate’ and lowers the cash rate by 50bp or less, we will look for a green, five-minute candle to confirm a buy entry on two lots of NZDUSD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on purely on discretion, and in and effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, as the outlook for growth and inflation falter, the central bank may continue to lower borrowing costs at a rapid pace and may leave the door open for further easing as policy makers utilize all of their available tools to stimulate growth. As a result, if the RBNZ lowered the cash rate by 75bp or more, and reinforces a weakening outlook for interest rates, we will look to sell the kiwi-dollar, and will follow the same setup for a short trade as the long position mentioned above, just in reverse.
Rates Fall Less Than Expected- Stronger Than Expectations Chart
Further Easing Ahead-Lower Than Expectations Chart
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
Written by David Song, Currency Analyst
Full Article
The Reserve Bank of New Zealand is widely expected to lower the benchmark interest rate by another 75bp to a record-low of 2.75% in an effort to steer the economy out of deepening recession, which is likely to weigh on the exchange rate as policy makers hold a dour outlook for growth and inflation.
Trading the News: Reserve Bank of New Zealand Interest Rate Decision
What’s Expected
Time of release: 03/11/2009 20:00GMT, 16:00 EST
Primary Pair Impact: NZDUSD
Expected: 2.75%
Previous: 3.00%
Impact the Reserve Bank of New Zealand Interest Rate Decision had on NZDUSD through the last 2 months
January 2009 Reserve Bank of New Zealand Interest Rate Decision
The Reserve Bank of New Zealand lowered the benchmark interest rate by another 150bp to a record-low of 3.50%, and is anticipated to lower borrowing costs further as policy makers utilize all of their available tools to pull the economy out of its worst recession in nearly two-decade. Governor Alan Bollard said that the central bank will take ‘a more stimulatory position’ to shore up the economy, and stated that they will move ‘quickly’ to stimulate the ailing economy in order to avoid a deep and prolonged recession throughout the region. Meanwhile, the International Monetary Fund said that they expected the global economy to grow at an annual pace of 0.5% in 2009, which is the lowest level since World War II, and as trade conditions deteriorate, the outlook for the export-driven economy remains bleak. As a result, the RBNZ is expected to hold a dovish outlook going forward, and is likely to cut rates further to avoid a deepening recession.
December 2008 Reserve Bank of New Zealand Interest Rate Decision
RBNZ Governor Alan Bollard and Co. lowered borrowing costs at a record pace in December in an effort to steer the $128B economy out of its worst economic slump in 18 years. The central bank cut the official cash rate by 150bp to 5.00%, which is the biggest reduction since policy makers began using the official cash rate to manage monetary policy in 1999, and is widely expected to reduce the interest rate further as the RBNZ ‘takes monetary policy to an expansionary position.’ Dr. Bollard stated that ‘some further but significantly smaller reductions in interest rate may be warranted’ as the outlook for growth and inflation falter, and went onto say that he expects economic activity to contract 0.2% and forecasts the annual rate of inflation to fall to 1.5% throughout the first-half of the year as the global economy faces its worst financial crisis since the Great Depression.
What To Look For Before The Release
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:
Bullish Scenario:
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.
Bearish Scenario:
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.
How To Trade This Event Risk
The Reserve Bank of New Zealand is widely expected to lower the benchmark interest rate by another 75bp to a record-low of 2.75% in an effort to steer the economy out of deepening recession, which is likely to weigh on the exchange rate as policy makers hold a dour outlook for growth and inflation. A Bloomberg News survey shows that the median forecast held by the 13 economists polled project the RBNZ to lower the cash rate by 75bp this month however, as the $128B economy faces its worst economic slump in nearly two-decades, Governor Alan Bollard may surprise the markets with a larger-than-expected rate cut in order to stimulate the ailing economy. Business confidence in the region fell to -41.2 from -35.0 in January, which is the second-lowest reading on record, and firms are likely to turn increasingly pessimistic towards the economy as demands from home and abroad deteriorate. Retail spending in the fourth quarter slipped another 0.6% after falling 0.9% in the previous quarter to mark its first full-year contraction on record, and conditions are likely to get worse as consumer confidence holds at a 10-year low. Moreover, home sales in January fell 28.5% from the previous year to reach an annual pace of 3,706, which is the lowest level since 1989, and demands for real estate purchases are likely to fall further over the year as households face a weakening labor market. The jobless rate rose to a five-year high of 4.6% in the fourth quarter as firms continued to cutback on employment to reduce costs, and as trade conditions deteriorate, economic activity within the export-driven economy is likely to weaken further throughout the first half of the year. As a result, the RBNZ may continue its easing cycle in the months ahead with the government pushing for additional stimulus to shore up the economy as market participants anticipate the region to face a deepening recession. As the economic docket continues to reinforce fears of a prolonged downturn in the isle-nation, mounting growth concerns paired with a weakening outlook for inflation should continue to drag on the exchange rate, and as investors remain risk adverse, the kiwi is expected to hold its bearish trend against the U.S. dollar as the reserve currency continues to benefit from safe-have flows.
Expectations for a 75bp rate cut by the RBNZ clearly favors a bearish forecast for the given event risk however, if Governor Bollard reinforces his previous statements for ‘significantly smaller reductions in interest rate’ and lowers the cash rate by 50bp or less, we will look for a green, five-minute candle to confirm a buy entry on two lots of NZDUSD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on purely on discretion, and in and effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, as the outlook for growth and inflation falter, the central bank may continue to lower borrowing costs at a rapid pace and may leave the door open for further easing as policy makers utilize all of their available tools to stimulate growth. As a result, if the RBNZ lowered the cash rate by 75bp or more, and reinforces a weakening outlook for interest rates, we will look to sell the kiwi-dollar, and will follow the same setup for a short trade as the long position mentioned above, just in reverse.
Rates Fall Less Than Expected- Stronger Than Expectations Chart
Further Easing Ahead-Lower Than Expectations Chart
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.