Moderate spike expected in NZD/USD after RBNZ rate hike decision

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New Zealand Dollar/US Dollar (NZD/USD) halted the rally, last week, just ahead of 0.8542 which was the high of 20th October, hence forming a double top price pattern on the daily chart, since then the pair is being traded in range as traders are seen cautious ahead of the Reserve Bank of New Zealand (RBNZ) rate decision.

RBNZ Rate Expectations

On Wednesday, March 12, RBNZ is scheduled to announce its decision on the benchmark interest rate. According to the median projection of different analysts, the central bank is expected to announce an increase in the interest rate by 0.25% to 2.75%, hence making New Zealand the first developed economy to increase cash rate after the 2008 recession.

Surprise growth in the New Zealand’s housing sector, over a past few months, is prompting the kiwi central bank to announce the first rate hike in March, analysts believe. Some analysts had predicted the hike in February but the central bank kept the rate unchanged to see more signs for the steady growth and inflation outlook.

Stronger Kiwi Dollar

The kiwi dollar has surged more than 3 percent against greenback since the start of 2014. The unusual rise in the local currency was hindering RBNZ to consider a rate hike, but the dangerous-looking boom in the real-estate sector has provided sufficient reasons for the higher overnight lending rate. The construction costs in New Zealand’s housing sector jumped by 4.7 percent last year which was the fastest gain since 2008. High purchasing power, low unemployment rate, record low interest rate and government incentives for the housing market are some key reasons for the rapid growth in the sector.

Technical Analysis

As of this writing, NZD/USD is being traded around 0.8482; the pair has almost completed the Inverse Head & Shoulder (H&S) price pattern that emerged on the daily chart a couple of weeks ago. Two major resistance levels are being noted on the upside that are 0.8675, the 12-month high, and then 0.8841 which is the all-time high level printed by the pair in 2011, as demonstrated in the following chart. 

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So even if RBNZ makes history in the March monetary policy meeting, huge gains are not expected in the price of NZD/USD because the pair already appears overbought. A surge up to 0.8675, then a meaningful correction and then a strong upside rally, exposing 0.1000 in long term, could be a likely scenario for the pair.

It is pertinent that the Commodity Channel Index (CCI) has already entered into the extreme overbought territory with 178.00 reading. A CCI reading above 100 is considered an indication for overbought sentiment among traders. Similarly, the Relative Strength Index (RSI) is also hovering very close to the overbought area with 68.9 points reading. An RSI reading above 70 signals overbought bias.

Conclusion

New Zealand’s Central Bank appears all set to announce the first hike in the overnight lending rate on Wednesday. The technical analysis, however, suggests limited spikes in NZD/USD because the pair has already gained a lot amid RBNZ rate optimism.

To contact the writer of this story: Usman Ahmed at usman@forexminute.com