Are you looking for another top notch motivator for trading?
You might want to start preparing for the RBNZ policy decision next week!
Here are some points to note if you plan to trade the New Zealand dollar during the release:
Events under the microscope:
Reserve Bank of New Zealand monetary policy statement
When will it be released:
July 12, Wednesday: 2:00 a.m. BST
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The Reserve Bank of New Zealand is likely to keep interest rates unchanged at 5.50%.
- RBNZ policy makers are expected to signal they are ready to resume the rally if inflation picks up again
Relevant New Zealand data since the last RBNZ statement:
Arguments for Tight/Potentially Bullish for the New Zealand Dollar
ANZ Business Confidence Index An improvement from -43.8 to -31.1 in May, followed by another rise to -18.0 in June
Westpac Consumer Confidence Index It increased from 77.7 to 83.1 in the second quarter but is still a sign of pessimism due to financial pressures on households.
BusinessNZ Services Index It rose from 50.1 to 53.3 in May reflecting a stronger pace of expansion due to higher new orders and stocks
BusinessNZ Manufacturing Index It rose from 48.8 to 48.9 in May, indicating a slight slowdown in the pace of contraction in the industry.
Arguments for looser monetary policy / potential bearishness of the New Zealand dollar
GDP for the second quarter Underscoring New Zealand’s technical recession, the economy contracted 0.1% while the previous quarter’s figure was lowered to show a 0.7% drop in growth.
ANZ commodity prices It posted a meager 0.3% month-on-month rise in May, followed by a 2.3% decline in June on lower meat and logging costs.
GDT price index It has recorded a decline in dairy prices (dairy is one of New Zealand’s largest export products) since mid-May, with a decline of -3.3% at the last auction.
Previous issues and the impact of the risk environment on the New Zealand dollar
May 24, 2023
Action / Results:
The RBNZ increased the OCR by 0.25% as expected, but this was mostly seen as a peaceful rally since policymakers hinted that interest rates may have peaked.
They even revealed that the committee had a split vote on the decision because some wanted to sit on their hands due to low inflationary pressures and poor business conditions on the domestic front.
Not surprisingly, this sent the New Zealand dollar lower – which was already in a tailspin after the pessimistic Quarterly Retail Sales released the day before – which continued for the rest of the week.
Risk Environment and Internal Market Behaviors:
This trading week has been marked by relatively low volatility, as market players have been awaiting more updates on the US debt ceiling predicament.
Risk aversion returned to markets on Monday when news broke that debt ceiling negotiations collapsed over the weekend, keeping higher yielders on the back foot.
Concerns about China’s economic recovery and commodity demand weighed on risk assets in the middle of the week as well. Moreover, the hawkish rhetoric from the FOMC meeting minutes also kept investors wary of recession risks.
Risk appetite only picked up towards the end of the week, but the New Zealand dollar was barely able to hold on to its intraday gains.
April 5, 2023
NZD vs. Major FX overlay Planned by TV
Action / Results:
The RBNZ’s April decision was one of the most hawkish, surprising the central bank with a 0.50% rise instead of the expected 0.25% increase.
In addition, policymakers reiterated their hawkish bias by noting that inflation remains high and persistent. They even added that employment remains “Beyond the maximum level of sustainability” and that the financial system is sufficiently stable.
After a slightly range-bound start to the week, an upbeat RBNZ announcement sent the New Zealand dollar to new highs against its peers. However, the commodity currency quickly returned these gains (and some after that) during the latter half of the week as there were no further catalysts to sustain the rally.
Risk Environment and Internal Market Behaviors:
Traders seemed eager to cash in on the big market moves during this short trading week, as many were about to take off early for the Easter holidays.
To top it off, some downbeat PMI readings from major economies revived global recession fears and dragged riskier currencies back down.
price movement probabilities
Possibilities of feeling risky: The RBNZ’s decision on Wednesday comes after the release of the latest round of inflation figures in China, which may set the tone for overall market sentiment for the week.
So far, the dominant theme among most major economies is stubborn price pressures that motivate the need for tight monetary policy. On the other hand, the possibility of higher borrowing costs appears to limit the rise in risks, something that was clearly seen today after the United States printed strong jobs numbers, which fuels speculations of raising interest rates.
However, strong Chinese CPI readings could then dash hopes for PBOC stimulus, which could then translate into risk-off inflows early on. Later on Tuesday, the US will release its own set of CPI and PPI data, likely to influence sentiment for the rest of the week.
New Zealand dollar scenarios
Base case: The latest round of economic data out of New Zealand points to some weak improvements in business and consumer confidence, which likely won’t be enough to encourage RBNZ policymakers to raise interest rates again.
The continued decline in price pressures, as evidenced by the ANZ Commodity Price Index and GDT Auctions, is likely to be enough reason for policy makers to stress that they are likely to hold out for a while longer.
As this scenario has been priced in for some time, the NZD may have limited reaction to the actual announcement if we see a rate comment. And based on the broad recovery in the New Zealand dollar against the majors since the end of June, it is likely that some traders will ease up on long Kiwi positions (ie profit-taking), especially if there are signs that the hawkish tone softened further at this meeting. New long positions tend to be limited after a rally as well.
If risk aversion flows are in play during the decision, look for opportunities to short the NZD against lower yields/safe havens such as the Japanese Yen, Swiss Franc and US Dollar.
Alternative scenario: With some major economies like the UK, Australia and Canada still on the lookout for steady inflation, RBNZ officials may also welcome and point to the possibility of a resumption of rate hikes later in the year.
In this case, the New Zealand dollar may attract buyers, both financial and technical traders, especially against currencies with central banks sticking to a dovish stance such as the yen. If risk-based flows return, long opportunities make sense against the CHF and USD (if anti-dollar sentiment picks up next week on US inflation updates).
In either of the above scenarios, the lower risk rate strategy ideas are likely to be based on the idea of waiting to see the risk environment around the RBNZ decision and what the RBNZ actually says in both the statement and the press conference.
In other words, being patient may be a better strategy than expecting a certain outcome at this time, but of course, risk management depends on each individual trader’s trading style, risk tolerance and capital conditions.
