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NZD/USD Correction Unravels as RSI Falls Back from Overbought Zone

NZD/USD Correction Unravels as RSI Falls Back from Overbought Zone

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD struggles to retain the advance from the monthly low (0.6424), and recent developments in the Relative Strength Index (RSI) warn of further losses as the oscillator falls back from overbought territory and offers a textbook sell-signal.

NZD/USD Correction Unravels as RSI Falls Back from Overbought Zone

NZD/USD fails to test the monthly high (0.6576) even though New Zealand’s Gross Domestic Product (GDP) report shows an uptick in economic activity, with the growth rate climbing to 2.3% from 2.1% per annum in the second quarter of 2019.

The limited reaction in NZD/USD suggests the GDP data will do little to influence the monetary policy outlook as the Reserve Bank of New Zealand (RBNZ) retains a dovish forward guidance and pledges to “add further monetary stimulus if needed.”

Image of RBNZ interest rate decisions

However, it seems as though the RBNZ is in no rush to further embark on its rate easing cycle as “domestic economic activity is expected to increase during 2020,” and the central bank may largely endorse a wait-and-see approach at the next meeting on February 12 as the government plans to boost infrastructure spending by an additional NZ $12B.

The rise in public expenditure may encourage the RBNZ to adopt a less-dovish tone as “members noted that fiscal stimulus could be greater than assumed,” but the weakening outlook for global growth may push Governor Adrian Orr and Co. to further insulate the New Zealand economy as “growth in global trade and manufacturing is weak and uncertainty remains high.”

In turn, the RBNZ may stick to the dovish forward guidance as the committee prepares a contingency plan “for an unlikely scenario where additional monetary instruments are required,” and the central bank may continue to push monetary policy into uncharted territory as officials warn that risks surrounding the economy outlook remain “tilted to the downside.”

With that said, NZD/USD may face a more bearish fate in 2020 as the Federal Reserve sees US interest rates on hold over the next 12 months, and the advance from the monthly low (0.6424) may continue to unravel over the coming days as the Relative Strength Index (RSI) falls back from overbought territory and offers a textbook sell-signal.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, the broader outlook for NZD/USD remains tilted to the downside as the exchange rate trades to a fresh yearly-low (0.6204) in October.
  • However, failure to break/close below the Fibonacci overlap around 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) has spurred a near-term correction in the exchange rate, with the exchange rate climbing back above the former-support zone around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • Nevertheless, the near-term correction in NZD/USD appears to be unravelling following the string of failed attempts to close above 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with a break/close below 0.6550 (50% expansion) to 0.6570 (61.8% retracement) opening up the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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