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NZD/USD Outlook Hinges on RBNZ Amid Failure to Test January High

NZD/USD Outlook Hinges on RBNZ Amid Failure to Test January High

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD appears to be stuck in a narrow range following the failed attempts to test the January high (0.6733), and the exchange rate may continue to consolidate ahead of the Reserve Bank of New Zealand (RBNZ) interest rate decision as the central bank is expected to keep the official cash rate (OCR) at the record low of 0.25%.

NZD/USD Outlook Hinges on RBNZ Amid Failure to Test January High

NZD/USD struggles to retain the advance from the start of the month even though the crowding behavior in the US Dollar persist, and lack of momentum to take out the July high (0.6716) may keep the exchange rate under pressure as the Relative Strength Index (RSI) appears to be deviating with price, with the indicator establishing a bearish trend following the extreme reading in June.

Image of DailyFX economic calendar for New Zealand

Looking ahead, the RBNZ rate decision my influence NZD/USD as the central bank plans 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 a batch of dovish comments may produce a bearish reaction in the New Zealand Dollar central bank remains “prepared to provide additional stimulus as necessary.”

It seems as though the RBNZ will rely on its current tools to support the economy as “the existing LSAP programme is continuing to ease monetary conditions,” but the central bank may show a greater willingness to expand the size and scope of its asset purchases as “the Committee agreed that it is not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate.”

Image of RBNZ interest rate decisions

Source: RBNZ

The RBNZ may emphasize that “Committee continues to prepare for the use of additional monetary policy tools as needed, and negative interest rates may continue to be an option for the central bank as Chief Economist Yuong Hapublicized 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, the RBNZ may prepare New Zealand households and business for additional monetary support as risks to the economic outlook “remain skewed to the downside,” and a dovish forward guidance may drag on NZD/USD as the Federal Reserve carries out a wait-and-see approach for monetary policy.

On the other hand, an unexpected shift in the RBNZ’s language may trigger a bullish reaction in the New Zealand Dollar if Governor Adrian Orr and Co. highlight a material change in the future path for monetary policy, and it remains to be seen if the rate decision will impact the crowding behavior in the US Dollar as retail traders have been net-short NZD/USD since mid-June.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 43.19% of traders are net-long NZD/USD, with the ratio of traders short to long at 1.32 to 1. The number of traders net-long is 17.36% lower than yesterday and 14.98% higher from last week, while the number of traders net-short is 10.06% lower than yesterday and 1.29% higher from last week.

The recent decline in retail interest comes as NZD/USD appears to be stuck in a narrow range, but the rise in net-long positions may continue to lift the IG Client Sentiment index from the extreme reading registered in June even though the exchange rate marks a string of failed attempt to test the January high (0.6733).

With that said, lack of momentum to take out the July high (0.6716) may keep NZD/USD under pressure, and the Relative Strength Index (RSI) may continue to establish a downward trend over the coming days as it reverses course following the string of failed attempts 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, but the advance from July appears to have stalled ahead of the January high (0.6733) as the RSI failed to push into overbought territory during the same period.
  • Lack of momentum to break/close above the Fibonacci overlap around0.6710 (61.8% expansion) to 0.6740 (23.6% expansion) may highlight a potential shift in market behavior as it lines up with the July high (0.6716), with the RSI reflecting a similar dynamic as it establish a downward trend following the extreme reading in June.
  • As a result, failure to hold above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region may push NZD/USD back towards 0.6550 (50% expansion), with the next 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.