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NZD/USD Rate Approaches June High while Net-Short Interest Jumps

NZD/USD Rate Approaches June High while Net-Short Interest Jumps

David Song,
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New Zealand Dollar Talking Points

NZD/USD appears to be on track to test the June high (0.6585) as it extends the advance from the start of July, with the appreciation in the exchange rate fueling a jump in net-short positions.

NZD/USD Rate Approaches June High while Net-Short Interest Jumps

The New Zealand Dollar trades to a fresh monthly high (0.6549) against its US counterpart as the IG Client Sentiment report continues to show crowding behavior in the currency market, with the retail crowd net-short NZD/USD since May.

Image of IG Sentiment for NZD/USD rate

The most recent update shows only 30.65% of traders are net-long NZD/USD, with the ratio of traders short to long at 2.26 to 1.The number of traders net-long is 10.71% higher than yesterday and 1.81% lower from last week, while the number of traders net-short is 1.87% higher than yesterday and 41.50% higher from last week.

The small decline in net-long exposure could be attributed to profit taking behavior as NZD/USD trades to fresh monthly highs, but it remains to be seen if the surge in net-short position will persist over the coming days as market participation is likely to pick up following the US holiday.

In turn, NZD/USD may face increased volatility on the back of growing interest, and the correction from the March low (0.5469) may continue to evolve as the Reserve Bank of New Zealand (RBNZ) appears to be on track to keep the official cash rate (OCR) at the record low of 0.25% over the coming months.

At the same time, it seems as though the RBNZ is in no rush to adjust the Large Scale Asset Purchase (LSAP) program as “members noted that any expansion would need to be driven by the economic outlook,” and the central bank may stick to the sidelines at the next interest rate decision on August 12 as “fiscal policy measures are expected to support economic activity.”

In turn, the RBNZ may unveil a less dovish forward guidance as Governor Adrian Orr and Co. pledge to “outline the outlook for the LSAP (Large Scale Asset Purchase) programme and our readiness to deploy alternative monetary policy tools in our August Statement,” and the recovery in the New Zealand Dollar may persist in the second half of 2020 if the central bank tames speculation for additional monetary support.

However, the RBNZ may keep the door open to implement a negative interest rate policy (NIRP) 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,” and speculation for additional monetary support casts a bearish outlook for NZD/USD as Federal Reserve Chairman Jerome Powell rules out negative US interest rates.

With that said, current market conditions may spur a test of the June high (0.6585) as the recent appreciation in NZD/USDspurs a jump in net-short interest, but the Relative Strength Index (RSI) undermines the resilience in the New Zealand Dollar as the indicator snaps the upward trend carried over from March and reflects a potential shift in market behavior.

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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 (0.6230) crossed below the 200-Day SMA (0.6321).
  • Nevertheless, NZD/USD managed to push above the February high (0.6503) earlier this month as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, but recent developments in the indicator highlight a potential shift in market behavior as the oscillator falls back from overbought territory and snaps the bullish trend from March.
  • Will keep a close eye on the RSI as the recent appreciation in NZD/USD pushes the indicator towards overbought territory, but lack of momentum to push above 70 may highlight a potential divergence with price as the exchange rate approaches the June high (0.6585).
  • The string of failed attempts to break/close below the 0.6370 (50% retracement) area has kept NZD/USD afloat, but need a break/close above the 0.6550 (50% expansion) region to open up the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with the next area of interest coming in around 0.6680 (23.6% 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.