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NZD/USD Rebound Susceptible to RBNZ Policy Following LSAP Expansion

NZD/USD Rebound Susceptible to RBNZ Policy Following LSAP Expansion

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD extends the advance from the start of the week, with the exchange rate initiating a fresh series of higher highs and lows, but the recent rebound may end up being short lived as the Reserve Bank of New Zealand (RBNZ) expands its Large Scale Asset Programme (LSAP).

NZD/USD Rebound Susceptible to RBNZ Policy Following LSAP Expansion

NZD/USD exhibits a similar behavior to its Australian counterpart, with both exchange rates tagging fresh monthly highs as the Reserve Bank of Australia (RBA) drops the dovish forward guidance for monetary policy and warns that “smaller and less frequent purchases of government bonds will be required” if market conditions continue to improve.

However, it seems as though the RBNZ will continue to deploy unconventional tools to support the New Zealand economy as the central bank announces that it will add “$3 billion of Local Government Funding Agency (LGFA) debt to its Large Scale Asset Purchase programme (LSAP).”

The expansion brings the “total size of the LSAP to $33 billion over 12 months,” and it remains to be seen if the RBNZ will take additional steps to combat the weakening outlook for growth as the central bank plans to “update its economic assessment and the size and scope of the LSAP at its next scheduled meeting on 13 May.

Unlike the RBA, the RBNZ may continue to endorse a dovish forward guidance as Governor Adrian Orr pledges to “keep monetary support going for as long as necessary through QE and other tools,” and the central bank may continue to utilize its non-standard measures as officials tame speculation for a negative interest rate policy (NIRP).

In turn, the RBNZ may uphold its commitment to “keep the OCR (official cash rate) at this level for at least 12 months,” but the dovish forward guidance may continue to drag on the New Zealand Dollar, with NZD/USD still at risk of giving back the advance from the yearly low (0.5469) as a bear flag formation unfolds.

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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 (0.6185) crosses below the 200-Day SMA (0.6408).
  • The negative slope in both the 50-Day SMA and the 200-Day SMA offer a bearish outlook for NZD/USD, and the rebound from the yearly low (0.5469) may continue to unravel over the coming days amid the lack of momentum to push above the Fibonacci overlap around 0.6070 (100% expansion) to 0.6100 (61.8% expansion).
  • The break of channel support along with the failed attempt to close above the 0.6000 (100% expansion) to 0.6010 (161.8% expansion) region may bring the downside targets back on the radar as a bear flag formation unfolds.
  • Another move below 0.5880 (100% expansion) may spur a more meaningful run at the Fibonacci overlap around 0.5740 (78.6% retracement) to 0.5790 (61.8% retracement), with the next area of interest coming in around 0.5640 (261.8% expansion) followed by the 0.5530 (161.8% expansion) region.
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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.