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NZD/USD Forecast: Bear Flag Takes Shape, RSI Retains Bearish Formation

NZD/USD Forecast: Bear Flag Takes Shape, RSI Retains Bearish Formation

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD struggles to retain the rebound from the yearly low (0.5469) even though US authorities take unprecedented steps to curb the weakening outlook for growth, and the recent rebound in the exchange rate may unravel over the remainder of the month as the Relative Strength Index (RSI) continues to track the downward trend from earlier this year.

NZD/USD Forecast: Bear Flag Takes Shape, RSI Retains Bearish Formation

NZD/USD fails to extend the recent series of higher highs and lows even though US lawmakers agree on a $2T fiscal stimulus package to combat the coronavirus, and the exchange rate may consolidate over the remainder of the month as a bear-flag formation takes shape.

Nevertheless, it seems as though the Federal Open Market Committee (FOMC) will take additional steps to support the US economy as the central bank plans to establish a “Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, and the unprecedented efforts appear to be curbing the flight to safety as the Dow Jones Industrial Average (DJIA) marks its best single-day performance since 1933.

The improvement in investor confidence may keep NZD/USD afloat, but the nationwide lockdown in New Zealand may put pressure on the Reserve Bank of New Zealand (RBNZ) to further support the economy as the “domestic measures to contain the outbreak of the virus are also reducing economic activity.”

It remains to be seen if the NZ$ 12.1B fiscal stimulus program will encourage the RBNZ to retain the current policy at the next meeting on May 13 as Finance Minister Grant Robertsonwarns thata recession in New Zealand is now almost certain,” and Governor Adrian Orr and Co. may boost the Large Scale Asset Purchase programme (LSAP) over the coming months as the central bank pledges to “monitor the effectiveness of the programme and make adjustments and additions if needed.

In turn, the RBNZ’s dovish forward guidance may continue to drag on the New Zealand Dollar, and NZD/USD may consolidate over the remainder of the month as a bear-flag formation takes shape, while the Relative Strength Index (RSI) still tracks the downward trend from earlier this year.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, 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 in March as the 50-Day SMA (0.6296) crosses below the 200-Day SMA (0.6438).
  • Lack of momentum to close above the 0.5880 (100% expansion) region may bring the downside targets back on the radar as a bear-flag formation takes shape, while the Relative Strength Index (RSI) continues to track the downward trend from earlier this year.
  • In turn, a break/close below the Fibonacci overlap around 0.5740 (78.6% retracement) to 0.5790 (61.8% retracement) brings the 0.5640 (261.8% expansion) level in focus, with the next area of interest coming in around 0.5530 (161.8% 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.

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