The Reserve Bank of New Zealand will announce its interest rate decision this evening and is expected to hold rates at 2.50%. Traders are increasing their expectations for an interest rate hike in the near term having bid the Kiwi to a 30-year high. Odds are in favor of the RBNZ to signal a future rate increase but given the global backdrop of two debt crises and market positioning, disappointment by the RBNZ could initiate a sharp pullback in the NZD/USD.
After the New Zealand interest rate decision the accompanying rate statement could contain more hawkish language given the strong GDP the New Zealand economy produced in H1. New Zealand GDP rose 0.8% in Q2 and 0.5% in Q1. Yesterday the NBNZ business confidence survey showed 47.6% of participants expect improving business conditions, up from 46.5%. Following the strong economic data markets have prices in 1.0% of tightening over the next 12 months.
But given the global economy currently faces headwinds with two major debt crises the RBNZ may wait another month before prepping the market for an interest rate increase. Should this occur, market positioning suggests the NZD/USD could decline sharply. Last week’s IMM data shows speculators have increased their long positions to the highest level since November of last year. A pullback in the NZD/USD could take the pair lower to 0.8515, the 38% Fibonacci retracement from the move beginning in mid-July.
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