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NZD/USD Analysis: RSI to Show Bearish Momentum Abating

NZD/USD Analysis: RSI to Show Bearish Momentum Abating

2020-10-05 02:00:00
David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD appears to have reversed coursed following the failed attempt to test the August low (0.6489), and the Relative Strength Index (RSI) may show the bearish momentum abating as it appears to be on the cusp of breaking out of a downward trend.


NZD/USD Analysis: RSI to Show Bearish Momentum Abating

NZD/USD trades in a narrow range following the limited reaction to the US Non-Farm Payrolls (NFP) report, and it seems as though key market trends will continue to influence the exchange rate as major central banks rely on their non-standard tools to combat the economic shock from COVID-19.

A further improvement in risk appetite may fuel the rebound from the September low (0.6512) as the Federal Reservevows to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace,” and the decline from the yearly high (0.6798) may turn out to be an exhaustion in the bullish trend rather than a shift in NZD/USD behavior even though the Reserve Bank of New Zealand (RBNZ) appears to be on track to deliver another round of monetary stimulus at its last interest rate decision for 2020.

It remains to be seen if the RBNZ will unveil a slew of new tools at its next meeting on November 11 as the central bank insists that “that a package of an FLP (Funding for Lending Programme) and a lower or negative OCR (official cash rate) could provide an effective way to deliver additional monetary stimulus, and Governor Adrian Orr and Co. may continue to endorse a dovish forward guidance in 2021 as officials “agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit.

In turn, the New Zealand Dollar is likely to face headwinds if the RBNZ continues to push monetary policy into uncharted territory, but more of the same from Governor Orr and Co. may keep broader market trends in place as the central bank looks to keep the Large Scale Asset Purchase (LSAP) Programme at NZ$100 billion.

Until then, NZD/USD may continue to reflect the inverse relationship between the US Dollar and investor confidence, but it seems as though the tilt in retail sentiment will persist in October as the recent flip in positioning quickly dissipates.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 35.84% of traders are net-long with the ratio of traders short to long at 1.79 to 1. The number of traders net-long is 16.33% lower than yesterday and 12.77% lower from last week, while the number of traders net-short is 2.51% higher than yesterday and 13.98% higher from last week.

The decline in net-long position could be a function of profit-taking behavior as NZD/USD trades in a narrow range following the rebound from the September low (0.6512), but the rise in net-short interest suggests key market trends will persist over the coming days as the crowding behavior from earlier this year returns.

With that said, the pullback from the yearly high (0.6798) may turn out to be an exhaustion in the trend rather than a change in NZD/USD behavior, and the Relative Strength Index (RSI) may show the bearish momentum abating as it appears to be on the cusp of snapping the downward trend carried over from the previous month.

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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 pushed NZD/USD below the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with the RSI slipping to its lowest level since April during the same period.
  • NZD/USD appeared to be on track to test the August low (0.6489) as the RSI established a downward trend in September, but the decline from the 2020 high (0.6798) appears to be unraveling amid the failed attempt to break/close below the Fibonacci overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • Failure to test the August low (0.6489) has pushed NZD/USD back above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region, but need a break/close above the 0.6680 (23.6% expansion) area to open up the overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion).
  • Will keep a close eye on the RSI as it reverses course ahead of oversold territory and approaches trendline resistance, but need a break of the downward trend to indicate a bullish outlook for NZD/USD.
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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.