New Zealand Dollar Outlook Hinges Upon RBNZ Rate Decision, Outlook

The New Zealand dollar has been gaining steam today as improved investor sentiment has sent “risky” assets rocketing higher. Adding to the mix, NZD/USD will face high event risk at 17:00 ET: According to a Bloomberg News poll of economists, the Reserve Bank of New Zealand (RBNZ) is forecasted to cut rates by 50 basis points to 2.50 percent.

However, Credit Suisse overnight index swaps are fully pricing in a 25 basis point cut, and are only pricing in a 36 percent chance of a 50 basis point reduction, and the divergence between these forecasts creates potential for the New Zealand dollar to respond to a “surprise.”

Based on the RBNZ’s policy statement from March, the central bank is still open to making monetary policy more accommodative, but they will not seek to implement the same aggressive cuts they’ve applied in the past as they said that they said “future cuts will be much smaller than observed recently.” With growth still slowing, the financial markets not yet stable, and inflation pressures receding, the odds seem to be in favor of a reduction. The NZD/USD will initially respond to actual rate decision, with a 25 basis point cut likely to provide a brief boost to the pair in light of the Bloomberg News forecast, while a 50 basis point (or larger) cut would weigh on the pair.

Whether the NZD/USD response can be sustained will hinge upon the RBNZ’s policy statement, as indications that they see the need to cut rates further, or signs that economic or financial market conditions have become worse than anticipated could push the pair lower. However, if the RBNZ suggests in their policy statement that they will leave monetary policy unchanged going forward, the New Zealand dollar could actually rally toward, or above, a region of resistance at 0.5792/0.5800.