RBNZ suggest a rate cut is on the cards

New Zealand Dollar Research Report

RBNZ suggest a rate cut is on the cards

Sterling New Zealand Dollar (GBPNZD) FX Technical Analysis

The RBNZ have had a significant shift in their monetary policy outlook this month - for some time now the market had been expecting the NZ central bank to keep interest rates on hold with a view to increasing them in the next 18 months. At April’s OCR event however, the RBNZ said “the effects of drought, fiscal consolidation and the high exchange rate are weighing on the effects of growth” and stated that “a significant reduction in inflation expectations would warrant a rate cut”

This triggered an aggressive sell off in the Kiwi which has helped the pound rally 10 cents off the 1.93 lows to briefly break 2.03 yesterday. As to when the cut may come, NZ inflation data for Q2 will be released late July so a fall may trigger action from the RBNZ at the following meeting. Perhaps however, it may come sooner that than in June when the RBNZ update its economic outlook at the Monetary Policy Statement.

That will certainly dictate the path the Kiwi takes over the next few months, but of course in the meantime we’ve got the looming UK election next Thursday. In 2010 during the last hung parliament the pound lost 5% against other major currencies and whilst I believe that for this coming election some of that downside has already been priced in, it’s not inconceivable for the pound to come under aggressive selling pressure if the voting results in another hung parliament.

With potential for heightened volatility you may want to consider using automated stop loss and limit orders as they can protect you against an adverse move in the price action whilst allowing you to target an upside move if the outcome is favourable. Using a stop loss order and a limit order in conjunction allows you to ring fence the market - setting your worst case and best case prices.

Technically GBPNZD remains in that clearly defined 20 cent range that seems to have been in play for an eternity. Downside is 1.90 and topside is 2.10. It failed to break up through 2.10 in Feb and fell short in March before heading towards the major support.

Buyers

After the strong bounce off 1.93 lows and subsequent 10 cent rally the pound has run out of stream for the time being. It’s looking a bit overbought on the RSI’s and initial support comes in at 2.00, then down to 1.98 (20 day moving average) and then 1.9300 recent lows. On the topside 2.0830 the March high is the target. Obviously you may wish to trade before the UK election takes place, but if you prefer to chance your arm, you could place stop loss and limit orders in the market to take advantage of/protect against the increased volatility we’re likely to see at the end of the week.

Sellers

Depending on your risk appetite and time frame, it would be worth placing a stop loss above the recent high at 2.03 as this may well be the top for the time being so have your safety net in above 2.03 and look to trade below 2.00 and a UK hung parliament.