The RBNZ Rate Statement was the biggest news event of this week, and I made a plan to trade it. This turned out as a losing trade, but my plan was sound and I’m not disappointed. Also, losing trades are fantastic learning opportunities.
At 3:00pm my local time, the RBNZ was expected to announce another Interest Rate cut. Probably due to a successful trade with USDCAD last week, I decided to trade INTO this event and take a short position before the announcement. At about 1:30pm my local time, I made (2) market sell orders at 0.6585. The Interest Rate cut of 0.25% (25 basis points) was announced, and the NZD immediately rallied, which was a big surprise for me. I managed the position to reduce loss as much as possible, and then set to work figuring out what happened.
Market Sentiment
- The market expected a 25 basis point (0.25%) cut
- Some analysts suggested a 50 basis point (0.50%) cut was possible
- NZD has fallen 8.5% since last cut in June
- Any RBNZ actions may already be priced in over the last weeks, but further dovishness should add to overall currency weakness
Market Fundamentals
- RBNZ cut Interest Rates to 3.25% on June 11, and more cuts were expected
- June 11 action was the beginning of an easing cycle
- Lowered Q1 2016 GDP forecast and Q1 CPI forecast
- Global Dairy Trade (GDT) auction prices fell to 6-year low
- Recent CPI came in at 0.4% vs. expected 0.5% (which is well off the inflation target of 2.0%)
Trading Plan: position for continued RBNZ easing policy and more NZD weakness from expected Interest Rate cuts. Take Profit above Support at 0.6500, and set mental stop higher than the 0.6650 Resistance.
Result: The RBNZ cut the Interest Rate by 0.25% as expected, but the NZD rallied. Although RBNZ governor Wheeler said that further easing is likely, he omitted a previous statement that the NZD was at “unjustifiable” levels. Although the Fundamentals support NZD weakness, the Market Sentiment was that the RBNZ positioning was not dovish enough.
Comments: I was wrong on Market Sentiment, but the Fundamental data supported my plan, and my Technicals were sound. The mental stop beyond the obvious short term resistance at 0.6650 saved me from being stopped out immediately after the announcement, and let me trim the loss a bit. Sentiment is more important than Fundamentals for short term trades. The weakness was already priced in, and I could have waited until after the announcement to gauge market reaction before taking a position.
My emotions are in check. The loss is no big deal. We are moving on.
Turning $100 into $1000 