News Column

How to trade the New Zealand dollar - and interest rates

July 22, 2014


WILL the Reserve Bank of New Zealand (RBNZ) raise interest rates this week? According to a Bloomberg survey, 14 out of 15 economists think it will. This makes the New Zealand dollar interesting to trade this week, as volatility tends to rise around central bank meetings. In fact, a central bank that is expected to change, or is in the process of changing, its key rate tends to attract investor attention. A prime example is higher sterling on the back of expected UK rate increases.

With the RBNZ, markets are expecting rate rises of 69 basis points over the next year. This should take the key rate from today's 3.25 per cent to almost 4 per cent. So if the RBNZ increases its key interest rate by 25 basis points each time, we can expect three meetings with rate rises.

High rates will attract money that wants to earn higher returns, and thus a stronger New Zealand dollar.

Yet not everyone agrees that the RBNZ will put up rates to almost 4 per cent. Some expect it will only raise rates once, and then pause. This creates an opportunity for anyone who thinks that markets are over-optimistic about New Zealand's economy. Reasons for slower rate rises include lower dairy prices, lower inflation, and geopolitical risk.

As no one really knows what the future will bring, it's important to use rules to limit risk. For this, traders will usually use technical analysis. As long as New Zealand dollar-dollar trades above the $0.8400 low, overall price trend will remain bullish and the upside is preferred. On a break of $0.8400, bearish traders will dominate moving forward, and the bullish case will be invalidated.

Want to know more about the New Zealand dollar and how to trade it? See for free resources.

Alejandro Zambrano is a currency strategy analyst at @AlexFX00

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: City A.M. (UK)

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