The Reserve Bank of New Zealand is expected to lower the rate by 25 basis points. There is a 60% chance that the official cash rate (OCR) will decrease by 10-15 basis points. Although the Performance Services Index is still contracting, it has shown slight improvement recently due to high-frequency activity data and PMIs. This might provide a small positive impact on the NZD, but any changes to the OCR compared to market pricing are likely to be minimal. There is also a 25% chance that the rate cut may reduce the OCR by more than 20 basis points, which would be a more dovish outcome than the current market predicts. The RBNZ’s comments about risks from weaker domestic data in Q2 will be important, as they might cause the NZD to drop by up to 1% during the day.

Unchanged OCR Track

The least likely scenario, with a 15% chance, suggests that the OCR could stay the same even after a cut. If this happens, the NZDUSD could rise by up to 1%, seen as a more hawkish approach. However, sustaining these gains would depend on positive market sentiment in the following trading sessions. After the Reserve Bank of New Zealand’s decision on August 15, which matched the most likely scenario, the market has fully accounted for the 25-basis-point rate cut. The NZDUSD showed only a slight reaction because traders widely expected this move. The key focus for the coming weeks will be the RBNZ’s forward guidance and upcoming data, not just the rate cut. We are currently awaiting new data to guide the next steps, especially since the Performance Services Index is still contracting. The latest Global Dairy Trade auction on August 19 showed a modest rise of 1.8% in whole milk powder prices, providing some support but not indicating a significant economic recovery. With quarterly inflation data from July steady at 3.6%, the outlook for further rate cuts is now less clear.

Strategies for Traders

This uncertainty suggests that traders in derivatives should consider strategies that benefit from increased volatility in the NZDUSD. Buying options, like straddles or strangles, can allow traders to profit from significant price movements in either direction. This could be a smart strategy to adopt ahead of next month’s employment figures. In late 2023, we noted a similar scenario when the market was divided on the RBNZ’s next step, leading implied volatility on NZDUSD options to jump from 9% to over 12% in just a few weeks. This history indicates that even after a clear rate decision, the following period can become unpredictable as the market looks for its next direction. Traders should prepare for these potential price swings. The reduced official cash rate track may diminish the attraction of the Kiwi dollar for carry trades, a popular strategy this year. Those with long NZD positions might want to hedge their risk by buying NZDUSD put options. This offers protection against potential declines if weaker domestic data in Q2 causes further depreciation of the currency. Create your live VT Markets account and start trading now.

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