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NZD/USD Rate Outlook Undermined by Bearish RSI Behavior

NZD/USD Rate Outlook Undermined by Bearish RSI Behavior

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD attempts to retrace the decline from earlier this month, but the exchange rate may continue to chip away at the correction from the 2019 low (0.6204) as the Relative Strength Index (RSI) falls back from overbought territory and fails to preserve the bullish trends carried over from the previous year.

NZD/USD Rate Outlook Undermined by Bearish RSI Behavior

NZD/USD pulls back from a fresh weekly high (0.6665) as US Retail Sales climb 0.3% in December, and the muted reaction to the US-China trade deal undermines the recent rebound in the exchange rate as the Trump administration remains reluctant to rollback tariffs.

In response, the Reserve Bank of New Zealand (RBNZ) maycontinue to endorse a dovish forward guidance and keep the door open to implement lower interest rates as Governor Adrian Orr and Co. pledge to “add further monetary stimulus if needed.

The slowdown in global growth may force the RBNZ to further develop a contingency plan “for an unlikely scenario where additional monetary instruments are required,” but updates to New Zealand’s Consumer Price Index (CPI) may keep the central bank on the sidelines at its first meeting for 2020 as the headline reading for inflation is expected to widen to 1.8% from 1.5% per annum in the third-quarter of 2019.

Image of RBNZ interest rate decision

It remains to be seen if the uptick in inflation will push the RBNZ to alter the forward guidance for monetary policy as officials anticipate “a lift in economic growth during 2020 from the easing of monetary policy that has taken place since early 2019.” As a result, the RBNZ may merely attempt to buy time on February 12 as “market measures of inflation expectations have increased from their recent lows,” while the government plans to boost infrastructure spending by an additional NZ $12B.

However, the ongoing shift in US trade policy may force Governor Orr and Co. to further insulate the economy as the World Bank cuts its global growth forecast, and the diverging paths between the RBNZ and Federal Reserve may produce headwinds for NZD/USD as Chairman Jerome Powell and Co. see US interest rates on hold over the next 12 months.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • The NZD/USD correction from the 2019 low (0.6204) appears to have run its course as it fails to produce a test of the July high (0.6791), with the opening range for 2020 casting a bearish outlook as the exchange ratesnaps the upward trend from December.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator falls back from overbought territory and fails to preserve the bullish formations carried over from the previous year.
  • Waiting for a close below the 0.6600 (38.2% expansion) to 0.6610 (38.2% expansion) region to open up the Fibonacci overlap around 0.6550 (50% expansion) to 0.6570 (61.8% retracement), with the next area of interest coming in around 0.6490 (50% expansion) to 0.6520 (100% expansion).

--- 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.