Reserve Bank of New Zealand to Raise Rates Later Today

Greg Michalowski |

One of the strongest economies in the world is New Zealand. The country has been able to benefit economically, initially from the rebuilding of the Christchurch area after the devasting earthquake of 2011, and then by a housing boom which has required raising rates and lmposing lending limits on the banks of the small island nation. The economy has also benefitted from being an exporter of "soft" commodties to emerging nations in the region - led by China.  

In February 2014, Governor Wheeler of the Reserve Bank of New Zealand raised rates for the 1st time since the 50 basis point cut in March of 2011, soon after the earthquake.  At each subsequent meeting since February, Wheeler has raised rates by 25 basis points. 

At 5 PM ET/9 PM GMT on Wednesday, the expectations are for another rise of 25 basis points to 3.5%. This would be the fourth rise during which time, the rate has moved up from 2.5% to 3.5%.  

Since New Zealand is the only "major" country to raise rates in 2014, their currency has also been one of the strongest of the year. The New Zealand dollar is higher against all the major currencies in 2014, with the lone exception of the Australian dollar with which it is little changed.  Against the US Dollar, Euro, Swiss Franc and Canadian Dollar the Kiwi (the nickname for the currency) is up by greater than 5.75%.  

What makes this meeting different from the others is that next month the central bank does not meet and in September, there is an election which may give the central bank cause for pause.  As a result, it is not so much what they are to do tomorrow, but what they may say about the chance of a change in rates come September.  Will they signal that the tightening will likely take place right before an election?

On Wednesday (Thursday in New Zealand), Governor Wheeler will issue a statement and will speak after the meeting as well. So all eyes and ears will be on what is said and/or implied. If he indicates that they will pause and assess the impact over the next few months, expect a fall in the NZDUSD and a test of the 100 day moving average at the 0.8618 level.  A break of that level would then look to target the 0.8500 area.  

If on the otherhand, he expresses the need to keep the tightening cycle going, a move back toward the 0.8800 level and then the high for the year at 0.8835, would be the technical targets for traders.  

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