Trade the strong against the weak

One of the key trading principles to really embrace in the FX world is that of pairing strength against weakness.

So, yesterday we had a good example of putting this into practice via a central bank policy decision. This was the decision by the RBNZ.

Going into the RBNZ interest rate decision, you may ask yourself what to do before the RBNZ rate meeting. The answer is simple, you are going to wait. Waiting for the central bank to show its hand. The RBNZ has now done that and that is what gives us a bearish bias.

Yesterday, after the decision we posted this outlook.

Reasons for NZD weakness

The RBNZ launched a set of very bearish policies extending its asset purchases programme. They increased their quantitative easing (LSAP) programme to $100bn from $60bln. Prior to this meeting, there were no expectations of an extension in their bond purchases. Furthermore, they extended the length of the programme from 12 to 22 months. To top off the bearish outlook the RBNZ then expressed a preference for a lower or negative official cash rate as well as a Funding for Lending Programme’. AN extremely bearish position.

So, we now have a short to medium term NZD weak bias, look to pair it with currencies as they show strength.