On Feb 12, the Reserve Bank of New Zealand (RBNZ) will decide on its interest rates. The market has forecast that the RBNZ will keep the Official Cash Rate (OCR) unchanged at 1.00%. At the end of last year, most analysts had predicted that the RBNZ would change its bias from an easing one to a neutral tone; in essence, leaving rates unchanged after a series of cuts. However, the coronavirus situation has changed the game, and suddenly, many of these analysts are no longer sure of what the RBNZ would do on Wednesday.
Inflation is ticking upwards, and so is the housing market. GDP growth is robust, and the government’s increase in infrastructural spending is poised to boost GDP over the next few years. These factors were all expected to allow the RBNZ to switch to a neutral stance to allow previous rate cuts to continue to stimulate the local economy.
Then comes the novel coronavirus outbreak. The death toll has topped 1000, and the outbreak has killed more people in a much shorter time than the 2002 SARS epidemic. New Zealand has had to respond by closing its borders to passenger traffic from China. China has shut down transportation and manufacturing activity in affected provinces, which has virtually crippled NZ exports to China.
Expectations are still for the RBNZ to leave the OCR unchanged. Still, the rate statement could contain a clause: the bank would be ready to cut rates if there is a greater negative economic impact from the coronavirus outbreak.
But again, you never know. The bank could decide to drop the blade.
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Technical Outlook for NZDUSD
The currency pair of choice to trade this event is the NZDUSD. Due to the uncertainty of response of the pair to the OCR decision and statement, extreme caution is advised.
If the RBNZ leaves rates unchanged and does not open the door for more easing, this may be viewed as NZD positive, triggering a recovery in the pair.
If the RBNZ leaves rates unchanged and opens the door for future easing as a result of the coronavirus outbreak, this may be viewed as NZD-negative. A rate cut is expected to achieve the same effect.
The NZDUSD has been on a downward trajectory as has most of the risky assets of the region. Initial downside targets remain at the 0.63498 and 0.62835 price areas. A break of these levels would target 0.62255, with the 2004 and 2006 lows of 0.59865 lurking below.
Recovery will allow the pair to challenge the March 2016 and October 2018 lows of 0.64187, with 0.64937 (May/June 2019 lows acting in role reversal) also coming into the picture. However, the pair continues to push into a downtrend, and any recovery may be an opportunity to sell on the rallies.
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