Wednesday, September 10, 2014

Why does the Forex market listen to the NZ Central Bank? | How the Mandelbrot algo routine works

Last night at around 1:00 AM in GMT terms, when we were safely tucked away in bed, the Reserve Bank of New Zealand (RBNZ) announced that it was leaving interest rates unchanged, at 3.5%. This could not have come as any great surprise to anyone as it had been well signalled in the previous statement of NZ monetary policy.

That, however, did not stop the Forex market from marking down the Kiwi against all its major counterparts. The reason for this perhaps lies in the statement of the governor of the RBNZ, Graeme Wheeler, which accompanied the rate announcement. He wrote:

“The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable. We expect further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise”.

So, the market seems to listen to the RBNZ, while it takes less notice of the output of other central banks, for example the Bank of England. Or could the move be as a consequence of Mr. Wheeler invoking the currently rampant US dollar, and reminding us all that Quantitative Easing (QE) in the US is about to come to a halt, as early as next month.

Or could the NZ government treasury department have taken a hand and helped the Kiwi to a lower state by intervening in the market? Perish the thought.

How the Mandelbrot algorithmic routine handled the RBNZ statement

One way or another, our Mandelbrot algorithmic routine had been set up, some days ago, to take a long position, if it got a signal, in the Australian dollar / NZ dollar pair [AUDNZD] (because the NZD is the secondary, or quote, currency in this instrument, any weakness in NZD will cause the pair to rise).

As mentioned, we were in slumberland, as we live in GMT time, but when the move came Mandelbrot got its signal and took a position, which can be seen on the chart above. Shortly after that a level of profit, which had been part of the Mandelbrot configuration, was reached. Then two things happened: Half the position was closed in order to take some profit off the table and the Stop Loss order, which always forms part of the Mandelbrot mode of operation, was moved to the entry point of the order, or the Break-Even level.

Now we have some profit in the bank, and we have a free trade on the rest of the order.

And it all happened while we were asleep.

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