New Zealand dollar traders prepare for the Reserve Bank of New Zealand (RBNZ) interest rate decision to be released tomorrow. The market expects a rate hike – what will the NZD do?
One of the main events of the trading week is the RBNZ decision scheduled in the upcoming Asian session. The central bank is expected to deliver the second consecutive rate hike, becoming one of the most aggressive central banks in the developed world to tighten the monetary policy.
In March 2020, the RBNZ did what all major central banks did – slashed the official cash rate to the zero boundary or twenty-five basis points. Now that the economy recovered and inflation creeps up, the RBNZ delivered one hike in October, and it is about to hike again this week, bringing the official cash rate to +0.75%.
This is a major development for currency traders because the divergence between major central banks’ monetary policies may lead to important flows in or out of a currency. For instance, in Europe, the European Central Bank has no plans to hike the deposit facility rate from below zero until at least 2023. Thus, the gap between the two interest rates should favor the New Zealand dollar.
The example is valid for any other currency, as the RBNZ leads other central banks in the race of normalizing the rates. So why is the NZD not stronger?
0.7000 playing a pivotal role for the NZD/USD pair
The NZD/USD is the most popular Kiwi pair and thus the most liquid one. A quick look at the daily timeframe reveals that the NZD/USD mostly consolidated this year. After making a yearly high in March and trading above 0.7400, it declined to 0.70 and below.
From that moment on, the 0.70 round number played a pivotal role. In other words, every time the market dipped below, buyers emerged, while any attempt to move above was met with heavy selling. If we add the dynamic support and resistance levels to this, we have a potential bullish flag pattern in the makings.
Bulls may want to try a contrarian trade on a move to 0.68, as the price meets dynamic support. On the flip side, a daily close below 0.68 would make a new lower low and opens the case for a bearish trend.