We’ve got a potentially volatile few days ahead for the New Zealand dollar as we get the latest monetary policy decision from the Reserve Bank of New Zealand (RBNZ) very soon.
Expectations are that the RBNZ will give us another 25 bps hike, which seems to be already priced in given the broad gains the Kiwi has made against the majors in February despite a largely risk-off environment.
Potential Scenarios to Watch
That brings us to a few potential scenarios/reactions to watch out that could give short-term traders solid opportunities to grab some pips this week.
First is a “buy-the-rumor, sell-then-news” scenario, where NZD sells-off if the RBNZ does in fact raise short-term interest rates to 1.00%. A sell-off after a rate hike is actually what we saw when the RBNZ did its second rate hike of 2021 back in November, possibly on traders taking profits after the then highly anticipated move and NZD rally from August 2021 to November 2021.
So, there is a precedent that we could see that action once again if the RBNZ moves 25 bps to 1.00% as expected, and the odds rise that NZD sells off if we get a surprise “no change” decision from the RBNZ.
A second potential scenario to consider is if the RBNZ hikes by more than 25 bps, a possibility due to not only the strong inflation data, but also the very strong employment data recently seen in New Zealand.
The RBNZ may also be considering the rising probability of COVID restrictions ending in New Zealand sooner rather than later, likely to lead to even hotter data down the road as the economy re-opens.
We could see short-term buying support for the Kiwi if the RBNZ did surprise the market with a strong hike, or maybe even just with hawkish rhetoric like setting strong expectations of more hikes ahead.
With these scenarios in mind, we think it’s best to sit back and see what the RBNZ gives us, and to wait for the price to confirm whatever reaction the market gives us. And we think the price action in NZD/JPY is creating a simple technical setup to watch in case volatility picks up a lot for the New Zealand dollar.
On the four hour chart of NZD/JPY above, we can see a very simple technical framework for buying or selling NZD/JPY if the RBNZ event sparks a short-term directional move.
We’ve got a symmetrical triangle forming at the moment, and with a big catalyst ahead, the simple setup is to buy on an upside break of the consolidation, if the RBNZ gives us a bigger rate hike than expected. A stop can be set to somewhere below the rising ‘lows’ pattern, and if targeting the early 2022 highs around the 79.00 handle, then a better than 1:1 potential return-on-risk is possible in a short amount of time.
But if a 25 bps hike or no hike scenario comes to pass, watch out for a break below the rising ‘lows’ pattern before considering a potential short position. Similar to the long setup, a 1:1 potential return-on-risk is doable in a short amount of time if using the area above the falling ‘highs’ as a stop guide and targeting the January lows.
But what do y’all think? Are we about to see the consolidation pattern break? Or will we see more choppiness after the event? Please let us know in our comment section below!
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