Last week the central banks of Canada and New Zealand have held a regular meeting concerning monetary policy. The result of the meetings was similar: the key interest rates have been raised to 0,5%. However, if the rate increase had stimulated the Canadian Dollar for further growth, the New Zealandia’s currency had fallen sharply. As a result, the intraday fall of NZDCAD currency has increased by 2%. Why do market participants react so differently to the actions of financial regulators?
The Reserve Bank of New Zealand has unexpectedly increased the rate by 0,5% (they had forecasted the increase by 0,25%). Commenting on this decision, the representatives of regulators have said that they prefer to increase the rate now instead of waiting for the further growth of inflation. And from the standpoint of the prevention of superfluous prices growth, this decision can be considered reasonable.
However, if the regulator sharply increases the rate now (currently in New Zealand it amounts to 1,5%), it reduces the potential for further growth. In other terms, the market participants will put in NZDCAD a less New Zealandia’s rate increase in the future because most of the key rate is already realized.
After increasing the interest rate from 0,5% to 1%, the Bank of Canada signals the further tightening of monetary policy. Minimally it is expected to transfer the rate within 2-3%. Besides, the balance of the Bank of Canada will start to decrease from April 25, and it also indicates the growth of the Canadian currency.
The Canadian financial regulator has started the super-soft monetary policy significantly later than the Reserve Bank of New Zealand, and it gives the greater potential for further growth of the Canadian currency in addition to the quite favorable dynamic of prices for the Canadian export goods (first of all, oil and gold).
From a technical point of view, the NZDCAD pair entered the downtrend after reaching the local maximum on March 7. The decreasing maximums and minimum confirm the strength of the trend. “Bearish engulfing” also indicates the continuing decrease.
The following trading strategy options can be suggested:
Sale NZDCAD after the rebound upwards in the range of 0,859-0,861. Take profit — 0,852. Stop-loss — 0,863.
Also, traders can use Trailing stop after the fixed Stop-loss at their disposal, when the price moves down.
This content is for informational purposes only and is not intended to be investing advice.
