NZD/USD – 3 Scenarios Surrounding the RBNZ Rate Decision

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NZD/USD - 3 Scenarios Surrounding the RBNZ Rate Decision

Once again, the Reserve Bank of New Zealand is expected to raise rates. The RBNZ has done so in the last 3 meetings, bringing the official cash rate from 2.50% to 3.25%. The market expects the bank to raise the OCR to 3.50% after today’s monetary policy meeting.

The RBNZ usually does not make much noise, but if there is no rate hike, or if bank governor Graeme Wheeler starts jawboning about the risk of a strong NZD, we might get bearish reaction in the kiwi.

Although from a fundamental perspective, there seems to be more room for a dovish surprise. The technical development in NZD/USD sets the pair up for a bullish continuation.

NZD/USD Daily Chart 7/23
NZD/USD Daily Chart 7/23

(click to enlarge)

The daily chart shows that the NZD/USD has already been in a bearish correction since hitting 0.8835. Let’s take a look at 3 scenarios surrounding the RBNZ meeting:

Scenario 1: RBNZ raise rates as expected, but NZD/USD does not rally right away. Status quo might not be able to give NZD/USD more fuel to rally. However, it should keep NZD/USD elevated. In this scenario, if price falls toward 0.86, and the RSI approaches 40, watch out for support. Then if there is support, expect an attempt to push toward 0.88 again. We might want to curtail the bullish outlook unless the RBNZ is hawkish and calls for even more rate hikes. Still, from a technical perspective, the market would be neutral-bullish, so there is still a good chance the market will make fresh highs on the year after a rate hike.

Scenario 2: RBNZ holds rate, takes note of risks, including a strong NZD. This dovish “surprise” should send NZD/USD lower. The 0.86 level might not hold, and price is likely to challenge the 2014 rising trendline that goes back to February. If the RSI breaks below 40, it would reflect loss of bullish momentum, and we should start expecting a consolidation period like the one in March through May,

Scenario 3: RBNZ holds rate but NZD/USD rallies. IF the NZD/USD rallies without fuel, watch out for the counter. The bank might say that it wants to wait until the rate hikes in the past 3 months work through the financial system, and traders might take that as a sign the bank is still hawkish and looking to raise rates. However, we should not be so easy to expect bullish continuation wtih NZD/USD pushing to fresh highs on the year. Therefore, with no rate hike, if the NZD/USD approaches 0.88, be ready for sellers.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.