Reserve Bank of New Zealand has its policy setting meeting later this week, which might be interesting. Last few weeks has witnessed increased strength on New Zealand dollar, in tandem with AUD. This is a cause for concern to RBNZ, which is not happy with lofty levels of the Kiwi. For some time now officials have been quietly mentioning more rate cuts, in effort to slow down, or stop NZD appreciation. They even put the option of intervention on the table, just like Canada have been threatening to do.

To date nothing came of BoC innuendos, and we have to wonder, what a rate cut would accomplish for RBNZ. Interest is already very low, and currencies are not driven by rate differentials. Observers point out that current NZD rise is connected to trade flow rather than monetary policy of any one country. Also, central bank might have little influence over given currency, if it is very popular, as is the case with New Zealand Dollar at the moment, or Aussie, too. However, looking a little closer at the details, perhaps, after all, we are dealing once again with the carry trade.

This table is a little dated and doesn’t include most recent run up in NZD, but serves the purpose in showing how interest rate is no longer in sync with the currency movement. But, even though the interest rate is at only 2.5%, a shadow of it once was, it compares favorably to other major economies. We are talking about 0.1% in Japan, 0.25% in Canada, Switzerland and US, 0.5% in UK and 1% in Eurozone. Put in this light, 2.5% in New Zealand and 3% in Australia might look very tempting to a lot of people. After all, not everybody is willing to keep money in currencies of Brazil or Turkey, no matter what the rates.

Regardless the reason behind the strength, rumblings from RBNZ over Kiwi came at a very interesting time in technical terms. Weekly charts of New Zealand Dollar suggest possible slow down in its appreciation. NZD has recovered lion share of the losses from 2008 and most of its crosses have arrived at chart levels were a serious resistance is very likely. Here is an example of NZD-CHF.

Most other charts are very similar, a little higher or lower in relation to that huge sell off, but this one is representative of Kiwi at large. Price is entering typical reaction zone, defined by FIB levels. Also, important resistance at about 0.7350 is right there, as well as a secondary indicator, the 100 SMA, which I treat as a trendline. Within this general zone we might be looking for reversal candlestick patterns. With weekly chart used, this could be lengthy process of few weeks. Any direct action by RBNZ in this environment might easily create reversal of some magnitude, perhaps as much 500 pips for this pair.

I’m not planning on trading on this large time frame, but maybe treat it as a guide for a transaction using daily chart. Will see how the market reacts to the meeting. Funny thing is, more and more central banks are displeased with strength of their currencies. Eventually they have to stop talking and start doing something- intervention- or will be loosing credibility. Perhaps they don’t care about it, and cheap talk is all they are capable of. I don’t know, but it will be interesting to find out. As long as one isn’t on the wrong side of the market.

Mike K.