Talking Points:

– NZD/USD trading higher after finding support below 0.71

– A quiet economic docket puts focus on the pair and the RBNZ rate decision ahead

– A rate cut is highly expected, perhaps shifting focus to the accompanying statement and the bank’s tone

The NZD/USD continues to push higher after finding support below the 0.71 handle following a decline on Friday’s upbeat US NFP report.

The push higher could reflect pre-positioning ahead of the RBNZ rate decision, which shifts our attention to possible market reaction on the news.

Against this backdrop we will form our outlook and look to find short term trading opportunities using different tools such as the Grid Sight Index (GSI) indicator.

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The Reserve Bank of New Zealand (RBNZ) August Rate Decision headlines an otherwise quiet economic calendar, and is set to hit the wires 21:00 GMT.

We highlighted recently the possibility for the Kiwi to find support as the NZD still carries one of the more attractive yields at a 2.25% Official Cash Rate, which could imply that in a record low rates environment the currency might remain supported on a search for yield basis.

Heading into today’s decision, the market is pricing in a 99% probability of a cut (according to swaps), which could help explain the currency’s appreciation lately, potentially on pre-positioning, as even a 2.0% rate looks attractive in the current environment.

This makes today’s announcement very interesting:

In their latest rate decision, the RBNZ said that “the exchange rate is higher than appropriate” and “is holding down tradables inflation”, while a lower New Zealand dollar would raise tradables inflation. The bank also emphasized that they ”expect a depreciation in the currency”.

This might paint the picture of a central bank that wants to see its currency lower, and inflation higher, but is potentially limited in its scope to cut rates on increasing risk of house pricing inflation, which seemed to have nudged the central bank to broaden LVR limits.

Against this backdrop, with a rate cut basically priced in, a 0.25bps move might potentially see the Kiwi trade higher, as it did with the AUD/USD in the manner we suspected.

A surprise, but possible, cut by 0.50bps seems likely to see the pair trade lower.

With that said, the effects of this latest move on loans is still unknown, which puts a question mark on the bank’s ability to go all out on rate cuts going forward, so a 0.25 bps cut today with a dovish statement hinting at further cuts down the line might potentially be the likely scenario.

If the market doesn’t buy into RBNZ dovishness, the Kiwi may trade higher, possibly limited to some extent on pre-positioning heading into the event.

Suffice it to say, an unlikely hold in rates seems likely to send the Kiwi surging.

NZD/USD 10-Min GSI Chart: August 10, 2016

The NZD/USD is trading around the 0.7216 level at the time of writing (see chart below), with GSI calculating significantly higher percentage of past movement to the downside in the short term.

The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns. By matching events in the past, GSI describes how often the price moved in a certain direction.

You can learn more about the GSI here.

NZD/USD Technical Levels:

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We use volatility measures as a way to better fit our strategy to market conditions. The NZD/USD is seeing slightly reduced levels of volatility (on 14-day ATR study). In turn, this could imply that range bound trading plays might be appropriate, but the RBNZ rate decision could see this situation change rapidly.

NZD/USD 30-Min Chart: August 10, 2016

(Click to Enlarge)

The NZD/USD is trading higher and the next big level of resistance appears to be the 0.7250 level, which proved key in the past.

Further levels of interest on a move higher might be 0.7278, 0.73 and 0.7326.

The main levels of potential support on a move lower may be the area around 0.7170, the 0.71 handle, 0.7080 and 0.7050.

When price reaches those levels, short term traders might use different technical tools and the GSI to view how prices reacted in the past given a certain momentum pattern.

We generally want to see GSI with the historical patterns significantly shifted in one direction, which alongside a pre-determined bias, and other technical tools could provide a solid trading idea that offers a proper way to define risk.

We studied over 43 million real trades and found that traders who successfully define their risk were three times more likely to turn a profit.

Read more on the “Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 31.8% of FXCM’s traders are long the NZD/USD at the time of writing, apparently trying to pick a top. The SSI is mainly used as a contrarian indicator implying further strength ahead.

You can find more info about the DailyFX SSI indicator here

— Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com

Follow him on Twitter at @OdedShimoni