How to Trade the RBNZ Rate Decision

This evening, the Reserve Bank of New Zealand will deliver their second monetary policy announcement of the year and the key question is whether the central bank will finally bridge the gap between their monetary policy with that of Australia's. In order to answer this question, we first have to look at how the economy has changed since the last monetary policy meeting. Based upon the following table that compares the latest economic reports with the numbers that the RBNZ had on hand at their last meeting, the economy has improved but there are still significant areas of weakness that will prevent the RBNZ from raising interest rates.

Performance of the Economy Since Last RBNZ Meeting

More recent indicators suggest that the New Zealand economy has improved and inflationary pressures are on the rise, but the problem is consumer spending. In December, retail sales excluding purchases of automobiles fell 1.8 percent. There has been a mild pickup in spending during the month of January (see NZ card spending report) but consumption decreased again in February. The pace of job losses slowed in the fourth quarter but that did not stop the unemployment rate from reaching a 10 year high. However the rise in the Manpower Survey in Q2 suggests that the labor market may have improved since then which is encouraging. Yet there could be a major disconnect between NZ businesses and consumers because consumer confidence deteriorated in February while business confidence hit a 10 year high. Overall, there are not enough improvements in New Zealand's economy to warrant an interest rate hike and barely enough for RBNZ Governor Bollard to grow less dovish. Aside from the pickup in inflationary pressures, the only reason why Bollard could be more hawkish is to prepare the market for a rate hike in the summer. With only 2 more monetary policy meetings to go before June, the RBNZ certainly doesn't want to just spring a rate hike on the market. Instead, they will gradually set the market's expectations for tightening and they could begin to do so this evening.

Where Does RBNZ Governor Bollard Stand?

Yet hawkish comments are far from certain because we have heard more caution than optimism from RBNZ Governor Bollard. Back in January, when they had their last monetary policy meeting, Bollard said specifically that as long as the recovery goes as planned, they expect to raise rates in the middle of 2010. Inflation is within their target range of 1 to 3 percent so that's not a problem but weak credit growth has kept household and business spending subdued. Bollard was also not confident about the sustainability of growth in their trading partners. Although the recoveries in Australia and the U.S. have continued to gain strength, in early February (the last time that we heard from Bollard), the central bank head said even though they have started to see reasonable growth figures, the "economy is still fragile" and they "haven't changed their view" about when to raise interest rates. However when they begin tighten, there could be some "meaty" rate rises. In other words, the RBNZ is not ready to push the GO button on interest rates but when they do, they will tighten quickly and aggressively.

Rate Hike Expectations

Of the 14 economists surveyed by Bloomberg, none of them expect a rate hike this afternoon. Based upon the implied futures contracts, the market expects a rate hike at the June meeting. The following chart from Bloomberg shows the distribution of possible level of NZ rates in the coming months. The central outcome (which is denoted by the red line) is the most likely outcome.

How to Trade the RBNZ Rate Decision

We expect the RBNZ to grow a tad more optimistic but since there is a good chance that they could also keep their tone intact, the best way to trade the RBNZ rate decisions is reactively. Wait until Bollard's comments are released and then enter into the trade. Back in January, the sell-off in the NZD/USD following the RBNZ monetary policy announcement had 2 additional days of follow through. In December, there was 24 hours of follow through.

NZD/USD Chart

Technically, the price action of the New Zealand dollar suggests that currency traders are positioning for hawkish comments from the RBNZ. The NZD/USD has strengthened for 4 consecutive trading days, putting itself into the Buy Zone, which we determine using Bollinger Bands. The 0.71 level will serve as resistance for the currency pair because it represents the 50-day SMA and recent highs. However if the NZD/USD sells off 0.6975 should serve as support due to the confluence of moving averages.