The Reserve Bank of New Zealand is anticipated to cut the rate by 25 basis points, with a 60% chance that the official cash rate (OCR) track will lower by 10–15 basis points. The Performance Services Index, still showing contraction, has slightly improved due to recent high-frequency activity data and PMIs. This could give the NZD a marginal positive effect, but changes in the OCR track compared to market pricing are expected to be minimal.
There is a 25% chance the rate cut will bring the OCR track down by more than 20 basis points, presenting a more dovish scenario than current market expectations. The focus will be on the RBNZ’s commentary regarding risks from weaker domestic data for Q2, potentially impacting the NZD by dropping up to -1% intra-day.
Unchanged OCR Track
The least likely scenario, with a 15% probability, sees the OCR track remaining unchanged despite the cut. This could increase the NZDUSD by up to 1% if regarded as relatively more hawkish. The long-term sustainability of such gains would depend on favourable risk sentiment in subsequent trading sessions.
Following the Reserve Bank of New Zealand’s decision last week on August 15th, which aligned with the most probable scenario, the market has now fully priced in the 25-basis-point rate cut. We saw a marginal reaction in the NZDUSD because the move was widely anticipated by traders. The key for the coming weeks is therefore not the cut itself, but the bank’s forward guidance and incoming data.
We are now watching new information to determine the next move, particularly as the Performance Services Index remains in contraction. The latest Global Dairy Trade auction on August 19th showed whole milk powder prices rise by a modest 1.8%, offering some support but not enough to signal a major economic turnaround. With quarterly inflation data from July still holding at a firm 3.6%, the path for further rate cuts is now much less clear.
Strategies for Traders
This creates an environment of uncertainty, which suggests derivative traders should consider strategies that profit from increased volatility in the NZDUSD. Buying options, such as straddles or strangles, allows for a position to benefit from a significant price move in either direction. This could be a prudent way to trade around the release of next month’s employment figures.
Looking back, we saw a similar pattern in late 2023 when the market was split on the RBNZ’s next move, causing implied volatility on NZDUSD options to jump from 9% to over 12% in just a few weeks. This history suggests that even after a predictable rate decision, the following period can become choppy as the market seeks new direction. Traders should anticipate and position for these potential price swings.
The lowered official cash rate track will likely reduce the appeal of the Kiwi dollar for carry trades, which have been a popular strategy this year. Those holding long NZD positions may want to hedge their exposure by purchasing NZDUSD put options. This will provide downside protection if weaker domestic data, as hinted at for Q2, causes the currency to depreciate further.
