Dovish Forward Guidance to Rattle NZDUSD Rate Rebound

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

The Reserve Bank of New Zealand (RBNZ) interest rate decision may fuel the recent rebound in NZDUSD as the central bank is expected to keep the official cash rate (OCR) at 1.00%, but a batch of dovish rhetoric may drag on the New Zealand Dollar as its spurs speculation for lower interest rates.

The RBNZ may move to the sidelines after delivering a 50bp rate cut in August, and the central bank may largely endorse a wait-and-see approach for the remainder of the year as the committee pledges to “monitor and assess the impacts of monetary policy, including the transmission through to retail interest rates.

In turn, the RBNZ meeting may spur a bullish reaction in the New Zealand Dollar if Governor Adrian Orr and Co. remove the easing bias, but a dovish forward guidance may rattle the recent rebound in NZDUSD especially as New Zealand’s Treasury Department identifies the lower bound for the OCR.

Impact that the RBNZ interest rate decision had on NZD/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

AUG

2019

08/07/2019 02:00:00 GMT

1.25%

1.00%

-110

-168

August 2019Reserve Bank of New Zealand (RBNZ) Interest Rate Decision

NZD/USD 5-Minute Chart

Image of nzdusd daily chart

Source: Trading View

The Reserve Bank of New Zealand (RBNZ) delivered at 50bp rate cut in August versus expectations for a 25bp reduction, and the central bank may continue to insulate the economy in 2019 amid the “the risk of a larger or more prolonged slowdown in global economic growth.

It seems as though the RBNZ took a preemptive approach to address the downside risks surrounding the region as central bank officials “agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

Nevertheless, the RBNZ may continue to push the official cash rate (OCR) to fresh record lows amid the weakening outlook for the Asia/Pacific region.

The New Zealand Dollar tumbled lower following the larger-than-expected rate cut, with NZDUSD slipping below the 0.6400 handle to close the day at 0.6377. Learn more with the DailyFX Advanced Guide for Trading the News.

NZD/USD Rate Daily Chart

Image of NZDUSD daily chart

Source: Trading View

  • Keep in mind, NZDUSD has traded to a fresh 2019-low (0.6255) in September after clearing the May-low (0.6482), with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator snaps the upward trend from earlier this year.
  • In turn, the broader outlook remains tilted to the downside, with the near-term outlook capped by the failed attempt to break/close above the Fibonacci overlap around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion).
  • Failure to preserve the monthly opening range raises the risk for a further decline in NZDUSD, with the downside hurdle coming in around 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion).
  • However, recent developments in the RSI keeps the door open for a larger rebound in the exchange rate as the oscillator bounces back from oversold territory, with the move above 0.6310 (100% expansion) opening up the 0.6370 (50% retracement) region.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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