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NZD/USD Rate Vulnerable to Dovish RBNZ Financial Stability Review

NZD/USD Rate Vulnerable to Dovish RBNZ Financial Stability Review

2020-05-25 01:00:00
David Song, Strategist
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New Zealand Dollar Talking Points

NZD/USD attempts to retrace the decline from the previous week as New Zealand Finance Minister Grant Robertson announces that the government will consider a national unemployment insurance program, but fresh remarks coming out of the Reserve Bank of New Zealand (RBNZ) may drag on the exchange rate as the central bank retains a dovish forward guidance for monetary policy.

NZD/USD Rate Vulnerable to Dovish RBNZ Financial Stability Review

NZD/USD appears to have marked another failed attempt to test the April high (0.6176) as it pulls back from a fresh monthly high (0.6158), and the exchange rate may continue to carve a series of lower highs and lows even though Mr. Robertson looks to “cushion the blow of job loss through both income protection and retraining.”

Nevertheless, the response by fiscal authorities may push the RBNZ to the sidelines as the central bank expands its Large Scale Asset Purchase (LSAP) programin May to NZ$60 billion from NZ$33 billion, and Governor Adrian Orr and Co. may carry out a wait-and-see approach over the coming months as “the Committee agreed that it will stand ready to deploy further tools as needed, should the need for stimulus continue to increase.”

In turn, the RBNZ may attempt to buy time at the next meeting on June 24, but the update to the Financial Stability Review may fuel speculation for a negative interest rate policy as Chief Economist Yuong Ha reveals that “we’ve given the banking system until the end of the year to get ready so that the option is there for the Monetary Policy Committee (MPC) in a year’s time.”

With that said, the RBNZ may continue to utilize its balance sheet in 2020 as Governor Orr insists that “we don’t want to go negative at this point,” but speculation for a NIRP in New Zealand may drag on NZD/USD especially as Federal Reserve Chairman Jerome Powell tames bets for negative US interest rates.

However, NZD/USD appears to be stuck in the range bound price action carried over from the previous month amid the string of failed attempt to test the April high (0.6176), which lines up with the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion), and the exchange rate may drift towards the May low (0.5921) as it carves a series of lower highs and lows.

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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 (0.5994) crossed below the 200-Day SMA (0.6316).
  • The negative slope in both the 50-Day SMA and the 200-Day SMA offer a bearish outlook for NZD/USD, and the advance from the yearly low (0.5469) appears to appears to be capped by the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion) as both price and the Relative Strength Index (RSI) snap the bullish formations from March.
  • Nevertheless, recent price action warns of range bound conditions as NZD/USD tags a fresh monthly high (0.6158) after struggling to test the April low (0.5843), with the exchange rate marking another failed attempt to test the April high (0.6176).
  • As a result, lack of momentum to hold above the Fibonacci overlap around 0.6070 (100% expansion) to 0.6100 (61.8% expansion) may spur a move towards the 0.6000 (100% expansion) to 0.6010 (161.8% expansion) region, with the next area of interest coming in around 0.5880 (100% expansion).
  • Need a break of the April low (0.5843) to open up 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).
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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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