Taking a Fundamental Approach to Forex Trading

Trading the New Zealand Dollar with the RBNZ Rate Decision

The Reserve Bank of New Zealand, RBNZ, is the central bank of New Zealand. Unlike other Western- type central banks, RBNZ is not completely independent. In other words, RBNZ can only adjust monetary policy under the Policy Target Agreement (PTA). Under this agreement, price stability and inflation target should be negotiated between the government and the Reserve Bank. The second of the PTA states the inflation target as "1 to 3 percent on average over the medium term defined in terms of All Groups Consumer Price Index." In order to achieve that, RBNZ top executives meet eight times each year to set the future course of overnight interest rate.

RBNZ Executive Structure
Governor
Deputy Governor
Head of Operations
Heads of various banks departments
Board of Directors (7 members)

Whether the RBNZ tends to increase, decrease, or maintain interest rate, the decision always has a direct impact on the New Zealand Dollar and this is why...

•	By increasing interest rate, the RBNZ is literally selling New Zealand government securities to major financial dealers who in turn would pay by transferring money to the RBNZ account. This would decrease the supply of the New Zealand Dollar in the banking system and hence appreciate its value.
•	By cutting interest rates, the RBNZ is literally buying New Zealand government securities from major financial dealers who in turn would get paid by transferring money into their accounts from the RBNZ. This would boost up the supply of the New Zealand dollar in the banking system and hence depreciate its value.

Suggested Strategies to trade the New Zealand dollar with this economic release:

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Before the decision: buy the rumors sell the new strategy: *If the market expects the RBNZ to hike, traders may buy the New Zealand dollar for some time before the announcement and square their position right after the decision. *If the market expects the RBNZ to cut interest rate, traders may sell the New Zealand dollars for some time before the announcement and square their position right after the decision./h2>

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After the decision: Surprise strategy *If the RBNZ decision comes in line with expectations, traders may prefer to stay on the sideline. *If the RBNZ cuts interest rate while the market was expecting it to hike or to stay on hold, traders may sell the New Zealand dollar in a very swift trade (1-2 hours). * If the RBNZ increase interest rate while the market was expecting to cut or to stay on hold, traders may buy the New Zealand dollar in a very swift trade (1-2 hours).