Forex Investment and Currency Trading

Tonight is the Reserve Bank of New Zealand’s Official Cash Rate (OCR) decision. It being an OCR Review there will only be a statement issued to explain the rate decision but no update of the forecasts.

Market expectation is for a 50 basis point cut with a dovish statement. Central banks around the world are announcing their predilection towards holding rates lower for longer. Canada, the Riksbank and ECB officials have all made statements to this effect and we will look to see if the RBNZ follow this trend. Announcing a reluctance to raise rates in the future is a verbal way to soften monetary conditions by trying to hold down the long end of the yield curve.

Appreciation in the NZDUSD and NZ TWI over the past month have outperformed falls in the DXY while interest rate differentials point to the currency around present levels. More medium term analysis suggests the NZ Dollar is undervalued - although not beyond the levels seen in 2001-2002 period. This presents clear event risk for the immediate currency reaction to the rate decision. A decision to reduce rates by only 25bps will surprise the markets to the upside and could result in a rally on the back of position squaring (spreads would also suggest NZD appreciation). But following this, the market should come to realise that a 25bps reduction is not sufficient easing in the face of a deteriorating economy and significant headwinds. Unfortunately for the RBNZ, the focus at present is on the US Dollar and the Kiwi is following in its wake. The lack of easing conditions via the currency will only place more pressure on rates to do the work instead.