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NZD Consolidates After Flash Crash as RBNZ Unveils Unconventional Tools

NZD Consolidates After Flash Crash as RBNZ Unveils Unconventional Tools

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD consolidates following the flash crash from earlier this week, but the New Zealand Dollar may face headwinds over the coming days as the coronavirus puts pressure on the Reserve Bank of New Zealand (RBNZ) to implement lower interest rates.

NZD Consolidates After Flash Crash as RBNZ Unveils Unconventional Tools

NZD/USD trades in a narrow range after crashing to a fresh yearly low (0.6008), but the recent rebound in the exchange rate may prove to be short lived as the RBNZ considers various tools to insulate the New Zealand economy from COVID-19.

Image of New Zealand Minster of Finance tweet

The RBNZ appears to be on track to combat the coronavirus even though the Minister of Finance, Grant Robertson, unveils a slew of fiscal measures to assist New Zealand households and businesses as Governor Adrian Orr outlines a list of unconventional monetary policy tools that are under consideration.

Image of RBNZ forecast

A recent speech by Governor Orr suggests the RBNZ is prepared to push monetary policy into uncharted territory as the central bank head warns that “while an effective zero bound for interest rate is far from the most likely outcome in New Zealand, it can’t be ruled out.

It seems as though the RBNZ will abandon the wait-and-see approach for monetary policy and reduce the official cash rate (OCR) at the next meeting on March 25 as the coronavirus continues to pose a threat to the global supply chain.

In turn, a rate cut paired with a dovish forward guidance may produce a bearish reaction in the New Zealand Dollar, and the recent rebound in NZD/USD may prove to be short lived as the central bank appears to be on track to alter the course for monetary policy.

Until then, NZD/USD may continue to consolidate as the Federal Reserve is widely expected to deliver another rate cut on March 18, with the Relative Strength Index (RSI) raising the scope for a larger rebound in the exchange rate as the oscillator bounces back from oversold territory and breaks out of the bearish formation from earlier this month.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • NZD/USD has failed to retain the range from the second half of 2019 as the decline from earlier this year produced a break of the October low (0.6204), with a ‘death cross’ taking shape as the 50-Day SMA (0.6460) crosses below the 200-Day SMA (0.6476).
  • However, the break of the August 2015 low (0.6197) was short lived, with the failed attempts to close below the 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) region pushing NZD/USD brief above the Fibonacci overlap around 0.6370 (50% retracement) to 0.6430 (78.6% retracement).
  • NZD/USD may continue to face range bound conditions following the flash crash from earlier this week, but the Relative Strength Index (RSI) raises the scope for a larger rebound in the exchange rate as the oscillator bounces back from oversold territory and breaks out of the bearish formation from earlier this year.
  • Need a closing price above the 0.6370 (50% retracement) to 0.6430 (78.6% retracement) region to open up the overlap around 0.6470 (50% retracement) to 0.6490 (61.8% expansion), but the downside targets may come back on the radar if NZD/USD struggles to hold above the 0.6180 (161.8% expansion) to 0.6210 (78.6% expansion) region.

--- 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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