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NZD/USD Technical Analysis Outlook Warns of RSI Divergence

NZD/USD Technical Analysis Outlook Warns of RSI Divergence

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD tags a fresh monthly high (0.6703) going into the end of July as the crowding behavior in the US Dollar persist, but the Relative Strength Index (RSI) appears to be deviating with price as the oscillator struggles to push into overbought territory.

NZD/USD Technical Analysis Outlook Warns of RSI Divergence

NZD/USD still appears to be on track to test the 2020 high (0.6733) as it extends the advance from the start of July, and the crowding behavior in the US Dollar may keep the exchange rate afloat as the IG Client Sentiment report continues to show retail traders net-long USD/CHF, USD/CAD and USD/JPY, while the crowd remains net-short NZD/USD, GBP/USD, AUD/USD and EUR/USD.

Image of IG Client Sentiment

It remains to be seen if the net-long US Dollar bias will carry into August as the Federal Reserve looks poised to retain the current policy at its interest rate decision on July 29, and more of the same from Chairman Jerome Powell and Co. may continue to drag on the greenback as the central bank vows to “increase its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace.”

Image of IG Client Sentiment for NZD/USD rate

Nevertheless, retail traders have been net-short NZD/USD since May, with the latest update showing 41.53% of traders are net-long the pair, while the ratio of traders short to long stands at 1.41 to 1.The number of traders net-long is 3.41% lower than yesterday and 6.25% lower from last week, while the number of traders net-short is 5.28% higher than yesterday and 1.41% higher from last week.

The decline in net-long positions could be an indication of profit-taking behavior as NZD/USD tags a fresh monthly high (0.6703), but the rise in net-short interest suggests the crowding behavior will persist over the coming days even though the exchange rate approaches the 2020 high (0.6733).

With that said, current market conditions may keep NZD/USD afloat as the Federal Open Market Committee (FOMC) relies of its lending facilities along with its asset purchases to support the US economy, but the Relative Strength Index (RSI) appears to be deviating with price as the oscillator struggles to push into 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 cleared the February high (0.6503) in June as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, and the exchange rate may continue to retrace the decline from earlier this year as it tags a fresh monthly high (0.6703) going into the end of July.
  • NZD/USD still appears to be on track to test the 2020 high (0.6733) as it extends the advance from the start of the month, but the RSI appears to be deviating with price as the oscillator struggles to push into overbought territory.
  • Will keep a close eye on the RSI as it flirts with overbought territory, but the failed attempts to break above 70 warns of a potential pullback in NZD/USD as the bullish momentum seems to be abating.
  • Nevertheless, the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion) remains on the radar for NZD/USD as it lines up with the January high (0.6733), but lack of momentum to hold above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region may push the exchange rate back towards 0.6550 (50% expansion), with the next downside area of interest coming in around 0.6490 (50% expansion) to 0.6520 (100% expansion).

--- 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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