With expectations so high ahead of today’s Reserve Bank of New Zealand monetary policy decision (Be Wary of RBNZ announcement), I take a look at what some of the key levels could be depending on the outcome of the decision.
- 25 bps cut and no firm commitment – NZDUSD could be headed back towards 0.77. Markets have high expectations and still NZDUSD is trading near its highest levels in over a year. Falling short of these expectations isn’t an option for the RBNZ if it wants to weaken the currency – unless it sees the housing market as a greater threat at which point other tools should be available to address this.
- 25 bps cut and firm commitment to further easing – I still see NZDUSD edging higher in this scenario as this is the least the markets appear to be expecting and they have rallied on this expectation. Under this scenario I expect the rally would be much more gradual though and maybe find resistance around 0.74 in the short to medium term. The absence of further action in the coming months though could see it trading around 0.77, as above, as forward guidance wears off.
- 50 bps cut and wait and see – This could appease the markets for now and stem the rally in the short term. We could even see a small correction in this scenario – buy the rumour, sell the fact – and retest the 0.6950/0.7 support in the short to medium term. Again though, the absence of further commitments or action before the end of the year could see NZD on the rise again.
- 50 bps cut and firm commitment to further easing – This would likely get the best reaction in the NZD from the RBNZs perspective and could see it buck the recent trend against the USD. In this scenario we could be headed back towards 0.6650 in the short to medium term but again, in order for losses to be sustained or built upon, the RBNZ will need to follow through on its commitment or markets will test them again.