RBNZ Set to Hike Benchmark Rate

The New Zealand Dollar fell for the second consecutive dayfollowing Monday’s bearish closing price reversal top formation. Wednesday’sdecline was blamed on a drop in business confidence, but some traders attributethe weakness to position squaring ahead of tonight’s interest rate decision bythe central bank.

The New Zealand Dollar fell for the second consecutive dayfollowing Monday’s bearish closing price reversal top formation. Wednesday’sdecline was blamed on a drop in business confidence, but some traders attributethe weakness to position squaring ahead of tonight’s interest rate decision bythe central bank.

Over the short-run speculators have been driving by the Kiwiin anticipation of a hike in the key borrowing rate. Traders are looking for aquarter-point hike to 3 percent. The weakness in the Australian inflation rateis not expected to have an affect on the Reserve Bank of New Zealand’s decision. Recenteconomic data suggests that worries about inflation getting out of control arestrong enough to warrant a rate hike at this time.

Overnight Australiareported a lower than expected rise in its Consumer Price Index. This is astrong indication that the Reserve Bank of Australia is going to refrain fromhiking its benchmark interest rate at its next meeting on August 3rd. Traderssold the Aussie on the news. Weaker U.S. equity markets helped maintainthe weaker tone in this market.

The U.S. Dollar strengthened following the release of a poordurable goods report. Economists were looking for a 1.0% increase; the actualchange was reported as -1.0%. Investors did an about face following the releaseof this data, buying the Dollar and selling higher risk currencies. Recentlybearish news regarding the economy had been driving down the Dollar. Today’sreaction indicates that investors may becoming concerned that a weak U.S.economy will slow the global expansion. The drop in equity markets alsocontributed to the strength in the Dollar. After the bearish report and theinitial reaction, the Dollar settled into a range against most majorcurrencies.

This afternoon’s release of the Fed’s Beige Book had alimited affect on the Dollar. The consensus is the report paints a weak picturefor the economy. The market reacted as if the report was a non-event. Thereason for the flat reaction may have been that this news had already beenfactored into the markets since economic reports have been weak and FedChairman Bernanke stated last week that weak employment and slow GDP growthwill continue to plague the economy.

The tone in the market appeared to be pro-Dollar today whichcould set up for a rally late in the week once the currency pairs breakout oftheir trading ranges.

Technically the Euro is still struggling with thepsychological 1.30 price level. It seems that a close over this level may bethe only way to trigger an acceleration to the upside.

The British Pound closed higher but backed off after testinga major 50% price level at 1.5635. The driving force behind Wednesday’sstrength was comments from Bank of England Governor Mervyn King.

King said he thought the 2nd quarter surprise gain in theGDP was “encouraging” but expects new taxes to keep inflation under control.This would mean the BoE would not have to aggressively raise rates to keep alid on inflation. King also said the central bank policymakers face a“difficult” challenge as it seeks to balance the risks for the economy. Thiscomment was very close to Bernanke’s assessment that the U.S. economy faces uncertainty.

King left open the possibility of more stimuli by statingthat their remains “room” to move in either direction and pledged to take the“appropriate” steps going forward in order to encourage a sustainable recovery.

In taking into consideration the state of the economy andKing’s comments, one can conclude that the BoE is likely to stay the course andleave interest rates at historically low levels. This means that the recentrally in the GDP USD was most likely triggered by a weak U.S. economy rather than speculation that U.K.interest rates would soon rise. Furthermore, King has to be cautious at thistime because a combination of a rate hike, new taxes and cost cutting may betoo much for the economy to handle at this time. These would be the key reasonsto trigger a decline in British Pound from its current level.

As we approach the end of the week, traders should be moreaware of the action in the U.S.equity markets. Today’s action wiped out the gains for the week which could bean indication that sentiment is shifting away from higher risk assets. Thiscould pressure the Euro and the commodity-linked currencies while supportingthe Japanese Yen. The strength in the Dollar could begin tonight if Asianindices decide to follow the U.S.equity markets lower.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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