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NZD/USD Rate Vulnerable to Textbook RSI Sell Signal

NZD/USD Rate Vulnerable to Textbook RSI Sell Signal

2020-06-11 04:00:00
David Song, Strategist
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New Zealand Dollar Talking Points

NZD/USD appears to be stuck in a tight range after taking out the February high (0.6503), but the Relative Strength Index (RSI) may offer a textbook sell signal as the oscillator appears to be on track to push below 70.

NZD/USD Rate Vulnerable to Textbook RSI Sell Signal

NZD/USD trades near the monthly high (0.6585) as the Federal Reserve retains a dovish forward guidance for monetary policy, but it seems as though Chairman Jerome Powell and Co. are in no rush to deploy more non-standard measures after expanding the scope of the Main Street Lending Programto allow more small and medium-sized businesses to be able to receive support.”

The Reserve Bank of New Zealand (RBNZ) may carry out a similar approach after expanding the Large Scale Asset Purchase (LSAP) programin May to NZ$60 billion from NZ$33 billion, and the central bank may adopt a wait-and-see approach officials expected “to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers.

However, Governor Adrian Orr and Co. may reiterate that “the Monetary Policy Committee (MPC) is prepared to use additional monetary policy tools if and when needed” as the Organization for Economic Co-operation and Development (OECD) warns that “all countries are projected to experience a deep recession in 2020 followed by a slow and gradual recovery in 2021.”

Image of OECD June 2020 forecast

The updated projections by the OECD highlight two possible scenarios for the world economy, with the single-hit scenario expected to bring a recovery of “5¼ per cent next year,” while global growth is “projected to decline by just under 7¾ per cent in 2020, before rising by around 2¾ per cent in 2021” in the double-hit scenario.

For New Zealand, “GDP is projected to shrink by nearly 9% in 2020 and only return to the pre-crisis level by the end of 2021” under the single-hit scenario, while “GDP is projected to shrink by 10% in 2020 and to remain 3.5% below the pre-crisis level by the end of 2021” if a second wave of COVID-19 infections occur.

Image of OECD June 2020 forecast

It remains to be seen if New Zealand will experience the single-hit scenario as Prime Minister Jacinda Ardent removes the social distancing measures, but the sharp slowdown in world trade may lead to a protracted recovery as “global export orders fell to their lowest level on record in April and remained exceptionally weak in May, with all countries reporting sizeable declines.

In turn, the RBNZ may keep the door open to 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 in a year’s time.”

Speculation for a NIRP in New Zealand may drag on NZD/USD later this year 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 takes out the February high (0.6503).

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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 (0.6129) crossed below the 200-Day SMA (0.6317).
  • 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, with the Relative Strength Index (RSI) highlighting a similar dynamic as it sits in overbought territory.
  • However, the RSI may offer a textbook sell signal for NZD/USD as the oscillator appears to be on track to push below 70.
  • Lack of momentum to push above the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6530 (78.6% expansion) may generate range bound conditions as NZD/USD continues to close above the 0.6490 (50% expansion) to 0.6520 (100% expansion) region.
  • Need a break/close below the 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion) region to open up the downside targets, with the first area of interest coming in around 0.6370 (50% retracement) followed by the 0.6310 (100% expansion) to 0.6320 (23.6% expansion) zone, which lines up with the 200-Day SMA (0.6317).
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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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