NZD/USD tests 200DMA as RBNZ joins the jumbo rate cut club

The RBNZ cut New Zealand’s cash rate by 50bps to 4.75% in October
Markets were priced for 44bps of easing, with 89 expected over the remainder of 2024
Markets now deem a follow-up 50 in November as highly likely
NZD/USD slides to 200DMA, an important technical level for directional risks

RBNZ goes big with a 50

The Reserve Bank of New Zealand (RBNZ) has joined the Federal Reserve in the jumbo rate cut club, slashing its cash rate by 50 basis points to 4.75% at the conclusion of its October monetary policy decision.

“The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy,” the RBNZ said in its policy staement.

“The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.”

Helping to explain the magnitude of the cut, the committee said annual consumer price inflation is now “within its 1 to 3 percent inflation target range and converging on the 2 percent midpoint.”

And does nothing to hose down speculation of another 50

In the minutes of the meeting released alongside the statement, the tone did nothing to hose down speculation that it will follow the jumbo cut with another when it next meets in late November.

“The Committee discussed the respective benefits of a 25-basis point versus a 50-basis point cut in the OCR,” the minutes said.

“They agreed that a 50-basis point cut at this time is most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.

“The Committee noted that current short-term market pricing is consistent with this decision.”

The nod to market pricing is important given 89 basis points of easing was factored in over this meeting and next, implying not one but two 50s were favored by traders by the end of 2024. The implied probability of a follow-up 50 has strengthened as a result, acting to push NZD/USD lower consequently.

NZD/USD testing important technical level

NZD/USD is testing the 200-day moving average in the wake of the RBNZ decision, a level that one glance tells you is important from a directional risk perspective. Momentum indicators continue to generate bearish signals, but I'm letting the price action tell me what to do near-term.

If the 200-day moving average holds you could initiate longs with a stop beneath for protection against reversal. Above, .6110 previously acted as support, meaning the downside break may see it revert to resistance. .6160 may also see some selling, coinciding with the intersection of horizonal resistance at .6157 with the 50-day moving average.

If the price were to break above the downtrend running from the recent highs, it may open the door for a bullish reversal to .6210 or even .6254, the intersection of uptrend and horizontal resistance.

Alternatively, if the 200DMA gives way, you could sell the break with a tight stop above it or .6110 for protection. A close below the 200 would add to conviction of the trade .6084 is the first downside level of note, but to make the short stack up from a risk-reward perspective, it really requires a trade target of .6049 or .5985.

-- Written by David Scutt

Follow David on Twitter @scutty

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