Forex Gump's  Instablog

The jig is up! Early yesterday morning, the Reserve Bank of New Zealand (RBNZ) admitted that it intervened in the forex markets recently to weaken the New Zealand dollar.

Although we don't know exactly when the central bank began its "secret" operations, NZD/USD price action suggests that it may have started around the middle of April.

If you take a look at the charts, you'll notice that the pair topped out at around .8676 and then proceeded to drop sharply for no apparent fundamental reason.

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What seems to be furrowing RBNZ Governor Graeme Wheeler's brow is how the New Zealand dollar's persistent strength might affect the housing market. As you may know, the housing market has been a pain in the neck for the central bank for a while now, as house prices have been soaring and posting record highs.

Meanwhile, the RBNZ has been unable to boost borrowing with lower interest rates because of the New Zealand dollar's stubborn strength. The strong Kiwi has also been hurting the exports industry and has been a major obstacle for an economy that's still struggling to recover from the devastating earthquakes that struck Christchurch.

In fact, Wheeler has been hinting at his intention to keep the Kiwi's gains in check ever since he stepped into office last year. Recall that, in his first statement as RBNZ Governor in October 2012, he already remarked at how the strong Kiwi has been hurting New Zealand's exports. A few months later, in his February statement, Wheeler blamed the overvalued Kiwi for keeping inflation at the bottom of their target range.

During those instances though, the Kiwi still managed to rally as traders focused on Wheeler's relatively optimistic assessment of the New Zealand economy instead of his subtle clues on intervening in the currency market.

Whether it caught you by surprise or not, the recent RBNZ move proves that the central bank is not hesitant to intervene in the forex market. Moving forward, Kiwi rallies could be more subdued, as NZD/USD might be unlikely to make any headway past the .8600 area.

Moreover, the latest RBNZ intervention has revived the currency war issue. The RBNZ's willingness to intervene directly in the markets suggests that smaller economies have been pressured to act on retaining their competitiveness in the global markets because of the quantitative easing programs of larger economies such as the U.S., euro zone, and Japan.

Do you think other central banks will intervene as well? Let us know what you think by voting in our poll below!

The BOE rate decision is scheduled tomorrow, Thursday (May 9) at 12:00 pm GMT. No monetary policy changes are expected, which means that interest rates will probably be held at 0.50%. It is also widely anticipated that the central bank would keep its asset purchase program steady at 375 billion GBP.

Let's take a look at what happened in the bank's last rate statement and what developments have taken place since then.

Back in April, BOE monetary policy committee members ended up keeping monetary policy unchanged. The minutes of the said meeting revealed that 6 members voted in favor of keeping bond purchases steady while 3 members dissented.

These three members were David Miles, Paul Fisher, and the BOE head honcho himself, Mervyn King. All three MPC officials voted for a 25 billion GBP increase in bond purchases.

Back then, the actual statement and minutes of the meeting didn't really spark any rally on the pound as the outlook for the British economy was very weak. In fact, there had been worries about the U.K. entering a triple-dip recession around that time!

Fast forward a few weeks later, British data started showing noticeable improvements. In fact, the latest GDP report showed that the U.K. economy was able to escape the dreaded triple-dip recession as it posted 0.3% growth in Q1 2013, a decent rebound from the 0.3% contraction in the previous quarter.

The U.K. was also able to chalk up higher than expected PMI figures for the construction, manufacturing, and services sectors. Medium-tier reports, such as housing-related data (Nationwide HPI and BBA mortgage approvals), have also printed good results.

With that, it is very likely that the BOE will keep monetary policy unchanged for now, as the British economy has been showing signs of resilience amid ongoing austerity measures. I wouldn't be surprised if BOE Governor King's statement turns out to be a little more upbeat this time around, as he could give a more hopeful economic outlook.

If that's the case, the pound could have a chance at outpacing its major counterparts with GBP/USD possibly making another test of 1.5600. As Big Pippin mentioned in today's Chart Art, the pair's rising channel on the 4-hour time frame is still intact.

If you're bullish on the pound, it might be more interesting to play pound crosses with currencies that are being weighed down by recent rate cuts, namely EUR/GBP and GBP/AUD. After all, these could provide divergent interest rate outlooks if the BOE does turn hawkish.

During its last interest rate statement in April, the RBA held rates steady at 3.00% but hinted its openness to further easing down the road.

At the time, RBA head honcho Glenn Stevens mentioned that inflationary pressures weren't too strong and that there was room for more easing should it become necessary.

However, markets still weren't quite sure if the RBA would go ahead and slap the markets with a rate cut anytime soon.

Those in the dovish camp said that the recent weakness in inflation and economic growth would be enough for the central bank to take action. They pointed out that inflation for Q1 2013 printed at 0.4% which disappointed forecasts for a 0.7% uptick.

On the other hand, a few market junkies said that the RBA would probably wait for more signs of weakness before actually pulling the trigger.

But alas! The doves won. Earlier today, the RBA lowered rates by 25 basis points down to 2.75%.

In his accompanying statement, Glenn Stevens said that a rate cut was only appropriate in light of recent economic developments, as the Australian economy appears to be growing at a slower pace. Slashing rates by 0.25%, the hope is that this would help the economy sustain economic growth while allowing the RBA to be within its inflation target range of 2%-3%.

So the RBA just cut rates, the Aussie is sure to get sold-off in the next few days, right? Err, don't get too excited just yet.

In case you've forgotten, the RBA also cut rates back in December 2012 and contrary to what most market participants were expecting, the Aussie rallied following the announcement.

Some argue that the reaction might have only been because a rate cut was already priced in. However, it may have also been because the RBA hinted that they wouldn't cut rates anytime soon.

With that said, you should take into consideration the RBA's monetary policy outlook before you bet the farm shorting the Aussie. This might be easier said than done though. The bank's statement doesn't really drop any hint on whether we'll see more rate cuts or not.

My guess is that the RBA will determine its next course of action according to the reports that will be released from Australia in the coming weeks. Of course, that's just my two cents. What do you think? Will we see a sustained sell-off on AUD/USD enough to break support at 1.0200 following the rate cut? Or will the level hold?

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