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NZD/USD Rate Forecast: Will RSI Offer a Bullish Signal?

NZD/USD Rate Forecast: Will RSI Offer a Bullish Signal?

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD has come up against the 200-Day SMA (0.6311) after clearing the April high (0.6176), and the bullish momentum may persist throughout the first week of June if the Relative Strength Index (RSI) pushes into overbought territory.

NZD/USD Rate Forecast: Will RSI Offer a Bullish Signal?

NZD/USD continues to retrace the decline from the March high (0.6448) on the back of broad based US Dollar weakness, and the advance from the 2020 low (0.5469) may continue to evolve as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June.

In contrast, the Reserve Bank of New Zealand (RBNZ) may move to the sidelines after expanding the Large Scale Asset Purchase (LSAP) programin May to NZ$60 billion from NZ$33 billion, and the central bank may merely attempt to buy time at its next meeting on June 24 as Finance Minister Grant Robertson announces that the government will consider a national unemployment insurance program that would “cushion the blow of job loss through both income protection and retraining.”

The response by fiscal authorities may encourage the RBNZ to carry out a wait-and-see approach over the coming months, but Governor Adrian Orr and Co. may continue to endorse a dovish forward guidance as “the Committee agreed that it will stand ready to deploy further tools as needed, should the need for stimulus continue to increase.”

It seems as though the RBNZ will rely on its balance sheet in 2020 as Governor Orr insists that “we don’t want to go negative at this point,” and it remains to be seen if the central bank will implement a negative interest rate policy (NIRP) in 2021 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.”

In turn, speculation for a NIRP in New Zealand may drag on NZD/USD later this year especially as Federal Reserve Chairman Jerome Powell tames bets for negative US interest rates, but the advance from the 2020 low (0.5469) may continue to evolve as the exchange rate the April high (0.6176), while the Relative Strength Index (RSI) approaches overbought territory.

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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 (0.6049) crossed below the 200-Day SMA (0.6311).
  • The negative slope in the 200-Day SMA offer a bearish outlook for NZD/USD, but the recent shift in the 50-Day SMA highlights a potential change in market behavior especially as the Relative Strength Index (RSI) approaches overbought territory.
  • The RSI may offer a bullish signal if the oscillator breaks above 70 and pushes into overbought territory.
  • The break/close above the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion) brings the Fibonacci overlap around 0.6310 (100% expansion) to 0.6320 (23.6% expansion) on the radar as it lines up with the 200-Day SMA (0.6311), with the next area of interest coming in around 0.6370 (50% retracement).
  • However, lack of momentum to clear the 200-Day SMA (0.6311) may undermine the recent advance in NZD/USD, with a move below the 0.6170 (50% expansion) to 0.6230 (38.2% expansion) region bringing the 0.6080 (100% expansion) to 0.6100 (61.8% expansion) area back on the radar.
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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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