Will the Kiwi fly? Or will a certain 'Dove' keep it flightless?

It is widely anticipated that we will see a 4th consecutive rate rise tomorrow from RBNZ to see the cash rate at 3.5%. The question is how much is already priced in.

After breaking to 3-year highs, the Kiwi Dollar lacked new any dedicating to keep the bullish momentum going.

Traders would remember Graeme Wheeler's talk of intervention if an "overvalued New Zealand Dollar" was accompanied by poor fundamental data coming out. So it should not come as too much of a surprise to have seen the Kiwi Dollar sell-off with the arrival of lower dairy prices and soft inflation data, as the Kiwi Dollar perched nervously at the 3-year highs. However immediately after it was dealt another blow as the world learnt of Malaysian Air Flight MH17, resulting in carry trades being closed with the obligatory flight to safety.

In just 3-days, Kiwi bears had undone 20 days of bullish gains before finding support at 0.865. The speed of the decline compared to the low volatility seen at the highs makes me suspect we may see a further low, before these highs are tested again.

However with the rate indecision tomorrow we can at least expect some modest gains as day-traders take advantage, assuming of course we do see a rate hike.

Increased by 25bps to 3.5%

We can expect modest gains as day traders attempt to take 'easy picking' but the focus will be on the following rate statement. For the bulls to expect anything more substantial we need to see hawkish comments from Wheeler. But due to the soft inflation data and lower dairy prices, I see this as an outside chance. In which case I expect 0.879 to cap as resistance.

Rate remains fixed at 3.25%

Whilst this is an outside chance (unlikely) it could provide a more tradable opportunity with extra legs. Below you can see the potential for a bearish continuation pattern which would target 0.852. However for this to be reached we would require a rate to remain fixed, a dovish statement, and for geo-political concerns to remain high (or increase).

I expect we will continue to range trade between 0.865 and 0.872 until tomorrow's rate decision. We are currently midway between this 70-pip range and price action leave potential for either a bullish reversal (double bottom) or bearish continuation (bear flag/pennant) to be confirmed either side of these key levels.

A break above 0.872 confirms a double bottom (bullish reversal) to target 0.879
A break below confirms a bearish flag/pennant to target 0.852 lows.

However it will be the rate decision and dovishness / hawkishness of the following statement which will proide the likelihood of the targets getting hit sooner, or later.