Trading the RBNZ Interest Rate Decision

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Trading the RBNZ Interest Rate Decision

Hopes are high for the RBNZ interest rate decision this week, as a string of economic events have led traders to expect an interest rate hike to take place. Earlier this week, New Zealand Prime Minister John Key urged the RBNZ to return rates to normal levels, giving NZD/USD a strong boost prior to the actual rate decision.

On its 4-hour time frame, NZD/USD looks ready to make a quick pullback to an area of interest before heading any higher. The pair is trading carefully in the past couple of days, as traders try to assess the likelihood of an actual rate increase from the RBNZ.

Such expectations open up a larger possibility of disappointment though and with that comes a potentially stronger selloff. Analysts speculate that the RBNZ might increase rates as expected but follow this up with a note of caution in saying that the next rate hike isn’t likely to happen anytime this year. After all, the RBNZ is wary of Kiwi strength and its possible negative impact on the country’s export industry.

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RBNZ Rate Hike Forecasts

On the other hand, the RBNZ might decide to accompany a possible rate hike with remarks saying that it is just the beginning of their tightening cycle and that more rate increases are to be expected. This opens up a better opportunity for traders to take advantage of the positive carry, particularly for NZD/USD and NZD/JPY. The large interest rate differential could enable traders to profit from long-term long positions as the carry trade could ensure constant profits even if the pairs barely move.

Going back to the technical setup on the 4-hour time frame of NZD/USD shows a potential pullback to the .8400 broken resistance level, which lines up with a short-term rising trend line and the Fibonacci retracement levels. Stochastic is deeply oversold, which means that Kiwi bulls are ready to push the pair back to its new highs sooner or later. On the other hand, a strong break below the .8400 mark could put the pair back in the range and on its way to test the middle or the bottom once more.

To contact the reporter of the story: Jonathan Millet at john@forexminute.com