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NZD/USD Forecast: Bearish Price Sequence Brings August Low on Radar

NZD/USD Forecast: Bearish Price Sequence Brings August Low on Radar

2020-09-24 00:05:00
David Song, Strategist
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New Zealand Dollar Talking Points

NZD/USD struggles to retain the advance following the Reserve Bank of New Zealand (RBNZ) interest rate decision as the decline global equity prices props up the US Dollar, and the exchange rate appears to be on track to test the August low (0.6489) as it extends the series of lower highs and lows from earlier this week.

NZD/USD Forecast: Bearish Price Sequence Brings August Low on Radar

NZD/USD may continue to reflect the inverse relationship between the US Dollar and investor sentiment as the exchange rate trades to a fresh monthly low (0.6536) and mimics the weakness in global equity prices.

The price action following the Federal Reserve interest rate decision suggests market participants wereanticipating a more dovish forward guidance as the central bankplans to “achieve inflation that averages 2 percent over time, and a further shift in risk appetite may continue to drag on NZD/USD as the central bank appears to be in no rush to alter the path for monetary policy.

In contrast, the RBNZ looks poised to announce a package of unconventional tools at its last meeting for 2020 as officials “agreed that further monetary stimulus may be needed in order to achieve its remit objectives,” with the central bank insisting that “progress being made on the Bank’s ability to deploy additional monetary instruments.”

The RBNZ revealed that “the instruments include a Funding for Lending Programme (FLP), a negative OCR (official cash rate), and purchases of foreign assets,” and it seems as though Governor Adrian Orr and Co. is moving away from quantitative easing (QE) as “the Monetary Policy Committee agreed to continue with the Large Scale Asset Purchase (LSAP) Programme up to $100 billion.

It remains to be seen if the RBNZ will tweak the LSAP after expanding the program in August, but speculation for additional monetary support along with the shift in investor confidence may produce headwinds for the New Zealand dollar ahead of the next central bank meeting on November 11 even though the crowding behavior in NZD/USD persist.

Image of IG Client Sentiment for NZD/USD

The IG Client Sentiment report shows retail traders have been net-short NZD/USD since mid-June, with 35.95% of traders net-long the pair as the ratio of traders short to long stands at 1.78 to 1.The number of traders net-long is 22.46% higher than yesterday and 9.49% lower from last week, while the number of traders net-short is 7.90% lower than yesterday and 0.74% higher from last week.

The recent jump in net-long position has helped to alleviate the tilt in retail sentiment as only 28.91% of traders were net-long NZD/USD earlier this week, while the decline in net-short interest could be an indication of profit-taking behavior as the exchange rate trades to a fresh monthly low (0.6536).

With that said, swings in investor confidence may continue to sway NZD/USD over the coming days as the US Dollar strength coincides with the decline in global equity prices, and the exchange rate appears to be on track to test the August low (0.6489) as it extends the series of lower highs and lows from earlier this week.

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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, with the exchange rate taking out the January high (0.6733) in September following the close above the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion).
  • However, lack of momentum to close above the 0.6790 (50% expansion) region has pushed NZD/USD below the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with the exchange rate trading a fresh monthly low (0.6536), while the RSI approaches oversold territory.
  • Will keep a close eye on the RSI as it sits at its lowest level since April, with a break below 30 likely to be accompanied by a further decline in NZD/USD like the behavior seen in March.
  • The August low (0.6489) sits on the radar as NZD/USD extends the series of lower highs and lows from earlier this week, but need a close below 0.6550 (50% expansion) to open up the Fibonacci overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • Next area of interest comes in around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion) followed by the 0.6370 (50% retracement) region.
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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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