RBNZ Rate Decision Preview: Forward guidance holds the key, technical set up favors NZD bulls

https://www.fxstreet.com/analy...

• RBNZ expected to leave monetary policy unchanged.
• Economy likely to recover faster-than-expected in Q2.
• NZD/USD could see ‘sell the fact’ response on the announcement?

RBNZ overview

At its monetary policy meeting scheduled this Wednesday, June 24, the Reserve Bank of New Zealand (RBNZ) is widely expected to leave the Official Cash Rate (OCR) unchanged at a record low of 0.25% for the second straight month.

New Zealand’s (NZ) central bank is seen maintaining its stance that the OCR will likely remain at 0.25% for at least until 2021 after slashing the rates by 75bps at its emergency meeting held on March 15^th.

The RBNZ is also anticipated to keep its quantitative easing (QE) programme size unchanged at around NZD60 billion, where it can buy around NZD1 billion of government bonds per week.

The decision will be announced at 0200 GMT. While there is no post-monetary policy press conference by Governor Adrian Orr, the accompanying monetary policy statement (MPS) will be closely eyed for fresh insights into the forward guidance.

All eyes on forward guidance

The MPS could offer a more optimistic outlook on the economy, given the country’s victory over the unprecedented coronavirus pandemic and recent better-than-fear economic indicators. The NZ Treasury recently acknowledged that domestic activity is stronger than it had assumed. This comes despite the NZ Q1 GDP having contracted 1.6% QoQ vs. -1.0% expected, in the face of the virus-imposed stricter lockdown measures.

According to the New Zealand Institute of Economic Research (NZIER), the economic slowdown from COVID-19 is likely to be “followed by a strong rebound.” The Shadow Board hoped for a V-shape recovery, which could encourage the central bank to retain the current policy in the second half of 2020. 

The RBNZ, however, could maintain a cautious outlook on inflation and labor market, as it strives hard to achieve the dual objective. Therefore, there is a chance that the RBNZ could emphasize the need for further QE expansion in the coming months should the deflationary pressures persist or the employment scenario remains less encouraging.  

Negative interest rates – an option?

Also, any hints on the negative interest rate policy (NIRP) in the MPS could be closely watched out for, especially in light of the recent NZD appreciation. The RBNZ Chief Economist Yuong Ha said that “we’ve given the banking system until the end of the year to get ready so that the option is there for the Monetary Policy Committee in a year’s time.” 

Although the NZIER’s Shadow Board once again favored an expansion of the central bank’s QE progamme over adopting a negative OCR, in its latest report released earlier this week.

To conclude, the traders could adopt the sell the fact trading approach for NZD/USD, as the status-quo is already priced-in. Also, the kiwi risks a correction following a 6% gain seen over the past month on the narrative of a quicker economic rebound.

The bulls, however, should not lose heart, as a less dovish forward guidance could trigger an extensive rally in the spot. This looks likely if the RBNZ tames speculations for additional monetary policy support.

A technical perspective

The path of least resistance for the kiwi appears to the upside, as the price is teasing a bull flag on the daily chart while it trades above all its major daily Simple Moving Averages (DMA).

Any softening of the dovish forward guidance could prompt NZD/USD to clear the falling trendline resistance at 0.6520 and daily closing above the latter would then confirm the bull flag pattern. The bullish break out could open doors towards 0.6700/50 levels.

The daily Relative Strength Index (RSI) points higher around 65.0, probing the overbought territory. This suggests there is room for further upside.

Should the RBNZ disappoint the bulls, the spot could drop back to test its upward sloping 21-DMA, now at 0.6405. A breach of that level could trigger a sharp correction, where the confluence of the falling trendline support and 200-DMA, around 0.6440/25, could offer some support.

At the press time, NZD/USD trades at 0.6515, up 0.55% on the day.

*Reprinted from FX Street. The Copyright all reserved by the original author