Today is a big day for the New Zealand dollar, as the Reserve Bank of New Zealand (RBNZ) is scheduled to publish the official cash rate (OCR) and rate statement. Since short term overnight interest rates are the key factor in the valuation of any fiat currency, investors are eagerly anticipating how the RBNZ will react to the changing economic climate through its monetary policy decision this month.

Currently, New Zealands official cash rate of 3.50% is one of the highest among developed nations and the analysts expect that the RBNZ will keep it unchanged for the time being. One of the main arguments behind keeping the OCR at its current level would be that the RBNZ does not want to create a real estate bubble, similar to the one currently seen in Australia. Recently, New Zealand Prime Minister John Keys told the press that the RBNZ is clearly trying to ensure theres not a bubble emerging in the housing market.

It appears that market analysts are developing a similar hypothesis regarding this weeks OCR decision as well. Tuatara Management Ltd. a provider of specialist advice in hedging foreign exchange and interest rates, recently released a statement mentioning that No change is expected in the official cash rate and we expect the same old talk about the NZD being overvalued and its level as being unjustified and unsustainable.

Solid inflation figures have given the RBNZ some breathing room with regards to interest rates

Forecasts that the OCR will be held at 3.50% also come from the healthy levels of inflation in New Zealand. The 1.6% inflation rate from the second quarter of 2014 came down to 0.8% in the fourth quarter, providing the RBNZ with ample breathing room for the time being.

Press conference likely to generate volatility

RBNZ Governor Graeme Wheeler will be holding a press conference shortly after the publication of the official cash rate. Wheeler will read a brief rate statement explaining the logic behind the monetary policy decision before taking questions from the press.

The official cash rate is often predictable and the rate decision is usually priced into the currency valuation prior to the press release. However, the Q&A session at the press conference can often lead to unanticipated answers from the RBNZ officials that create substantial volatility in the global foreign exchange market.

NZD/USD Outlook

If the NZD/USD breaks below key Support

Support, also referred to as the support line or support level, is a price an asset repeatedly tests on the downside but has difficulty moving below. It is typically an area where buyers will move in to purchase the asset. class=glossaryLink >support levels, analysts expect the pair to continue downwards

The NZD/USD remained range-bound during the fourth quarter of 2014. Never the less, the pair broke below strong support at 0.7615 in January amid strong economic data from the United States. Still, after reaching as low as 0.7175 on February 3 rd. the pairs price rebounded and bullish momentum pushed it to test the 0.7615 level once again.

Last week, NZD/USD finally broke below the intermediate upward sloping Trend

Trend refers to the general direction a financial asset is moving in, and can vary in length and durability. A strong trend can provide traders with valuable clues as to whether to open a buy or sell position. As a general rule, it is preferable to trade with the trend. class=glossaryLink >trend as the official US unemployment rate reached 5.5% for the first time since the global financial crisis. Currently, it is trading below the 61.8% Fibonacci retracement level of the previous upward swing.

Given that the market is expecting the RBNZ to remain neutral regarding its monetary policy, the current bearish momentum in the NZD/USD should prevail for the next several weeks. A market analyst from Westpac Bank, David Coloretti, told the media we expect the 0.7315 break to be sustained this week, and pave the way towards 0.7200. Technically, we are targeting 0.7150.

If the NZD/USD can close below 0.7150 this week, the pair may find additional bearish momentum as there is no other significant support after the 0.7150 level. In that scenario, the next logical target should be around 0.6900, which is the 161.8% Fibonacci extension level of the previous upward swing towards 0.7615.

Featured image: Reuters/Nigel Marple