Tonight’s Reserve Bank of New Zealand monetary policy announcement is one of this week’s most important events. Next to the Bank of Canada, which tapered asset purchases last month, the RBNZ is one of two central banks that could reduce stimulus this year. The housing market is on fire, commodity prices are on the rise, consumer spending rose more than expected and the unemployment rate dropped to 4.7% in the March quarter, well below the central bank’s 5% forecast.
Earlier this month, the central bank tightened its loan-to-value ratio to require all new investor loans to be less than 60% of the property value and owner-occupied loans to be restricted to 80% of value. In their Financial Stability Report, the RBNZ warned that the loan-to-value ratio restrictions could be tightened further if prices do not ease.
If you are trading the RBNZ rate decision, you may be able to buy NZD for some quick gains into the 02:00 GMT announcement. As long as the central bank upgrades its economic forecasts NZD will most likely trade higher ahead of Governor Adrian Orr’s 03:00 GMT press conference. Take profits before he speaks, as that’s the main volatility trigger. Listen carefully: if Orr emphasizes the need for low rates and suggests that rate hikes are a long way off, NZD could give up its gains quickly. However, if there are any unexpected shifts in policy, including an immediate tightening of the loan-to-value ratio, we could see NZD/USD make a run for 73 cents.