RBNZ OCR Decision/Statement Preview: Implications for NZDUSD

The Reserve Bank of New Zealand (RBNZ) is set to declare its Official Cash Rate (OCR) tomorrow, and will also release a rate statement along with it. A press conference follows after that, and these events will put the NZDUSD in the spotlight. 

The economy of New Zealand had downgraded the coronavirus outbreak alert levels from Alert Level 4 to Alert Level 3. However, this did not necessarily lead to a broad base reduction in restrictions. These tighter-than-normal restrictions for Alert Level 3 will impact economic activity to a higher degree than previously anticipated. 

The RBNZ is likely going to provide an assessment of labour conditions, housing prices and trade, with regards to the extent to which the coronavirus pandemic has affected the economy of New Zealand. Therefore, there is a need to pay attention to the GDP forecasts (if any) in the RBNZ’s rate statement or press conference. Westpac analysts are predicting a steeper drop in GDP, followed by a more vigorous but slower rebound in 2021. 

Against this backdrop, the questions that traders need to seek answers for in the RBNZ’s actions are as follows:

  1. Will the RBNZ downgrade its GDP forecasts for 2020 and 2021? 
  2. What will the RBNZ’s unemployment rate forecasts be for 2020 and 2021? The consensus is for the unemployment rate to peak at 9.5%. 
  3. What will be the projection for the debt to GDP ratio?
  4. What are the inflation expectations of the RBNZ?
  5. What will be the projected trajectory for house prices in the next three years?
  6. Based on the assessments of inflation, the unemployment rate and GDP growth, what will be the Official Cash Rate (OCR)? 

Even if these points are not touched extensively in the rate statement, expect journalists to ask some of these questions in the press conference. 

The RBNZ Official Cash Rate

The RBNZ was part of the coordinated interest rate cuts performed by central banks in March and April 2020. The OCR was cut to 0.25% in March. However, the Alert Level 4 lockdowns were inactive at the time. It is possible the subsequent damage that businesses and the economy incurred, along with the attendant loss of jobs that followed, were not factored into the last OCR decision. The full extent of this lockdown may still be unwinding. 

The consensus among analysts is that the RBNZ will retain the 0.25% OCR tomorrow. The RBNZ may make a declaration on its interest rate pathway even if they hold rates tomorrow. They may also be pressed on this by journalists in the press conference. Recall that the RBNZ had committed to keeping the OCR unchanged at 0.25% until March 2021. This is a much closer target than the 2023 target set by the RBA. There is a higher chance of the RBNZ having to act sooner, since it may not be under pressure to stretch the date at which changes to interest rates could happen. This is noteworthy for traders who would be watching the AUDNZD pair. 

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Price Outlook for the NZDUSD

The pair retains a bearish sentiment as the ANZ Business Confidence index plunged 21 points from the previous figure to – 45.6. The monthly and weekly charts show that the pair continues in the downtrend, forming lower highs and lower lows as the pair inches dangerously close to the March 2009 lows. 

A look at the weekly and daily charts reveal that price has just violated the rising wedge, and a return move to retest the broken lower wedge border is in progress. When the initial downtrend move that preceded the pattern is considered, the medium-term price projection is for the NZDUSD to trade down to the 0.54961 price level (23 March 2020 low). This move would have to contend with several pitstops at the 0.60464, 0.59865, 0.59049, 0.58422 and 0.57765 support levels. Additional support at 0.56978 also stands in the way. The downtrend can be truncated at any of these levels, causing the pair to bounce and retest the previous support prices above.

On the flip side, if the RBNZ’s actions are deemed as NZD-positive, then the pair may recover towards the lows of 30 September 2019 and 24 February 2020 at 0.62347. A further advance may provide opportunities for possible tests of the 0.62835 and 0.64187 price levels.

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