I was juggling a few phone calls leading up to the announcement and over it (with a slight pause at the top of the hour to get the announcement out on Twitter … and as a ps. I follow A LOT of twitter accounts and I didn’t see it come out anywhere as fast there as from @ForexLive) … so i have missed a few comments and questions.
NZD sold off, obviously, and very sharply. One thing that many novices to this game don’t get is that the ability to transact in a currency is not constant, and it is not the same across currencies. If you hold everything else equal (just for the purposes of this point) then transacting 100million USD in the EUR/USD is much quicker, easier, with less impact and at a lower spread cost than transacting 100 million USD in NZD/USD. And that translates to other costs as well.
One of the comments said the broker gapped 80 points in the NZD/USD. YES – the broker is relying on being able to offset your trade into the market and for that he is linked into liquidity providers … which in the Forex market basically boils down to the interbank market. The NZD interbank market is A LOT smaller than, for example, the EUR/USD interbank market. We are talking order of magnitude smaller (at least), OK?
Hope this helps.
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OK, so where to now for the NZD?
It’s a high yield currency, even more so now, so the Kiwi is going to attract those who want high yield. We’ve had a reaction to the announcement (‘sell the fact’, and why, in my initial post, here: Reserve Bank of New Zealand cash rate announcement – rate hike of 0.25% ) but today may not be the day to load up on Kiwi, there could well be more downside to come. Its an uncertain game. Risk management is an ongoing process.
Comments, as always, welcome.
