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NZD/USD Pullback Takes Shape Amid Failure to Test September High

NZD/USD Pullback Takes Shape Amid Failure to Test September High

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD is under pressure after trading to a fresh monthly high (0.6724) earlier this week, and the exchange rate may face a larger pullback going into November as the US Dollar appreciates on the back of waning investor confidence.

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NZD/USD Pullback Takes Shape Amid Failure to Test September High

NZD/USD appears to have reversed course ahead of the September high (0.6798) as the wave of lockdowns across Europe drags on risk appetite, and the exchange rate may test the October low (0.6547) ahead of the Reserve Bank of New Zealand’s last meeting for 2020 if the recent shift in investor confidence leads to a flight to safety.

Looking ahead, the RBNZ may provide a more detailed forward guidance at its next interest rate decision on November 11 as Governor Adrian Orr insists that there’s “plenty of room” for the board to adjust the Large Scale Asset Purchase (LSAP) Programme, which currently sits at NZ$100 billion, and the New Zealand Dollar may face headwinds over the coming months as the central bank prepares to deploy a slew of new non-standard measures in an effort to stimulate a stronger recovery.

In turn, the decline from the yearly high (0.6798) may turn out to be a change in market behavior rather than an exhaustion in the bullish trend, but the New Zealand Dollar’s 24% surge from the lows of Marchcould be the start of a prolonged period of strength against its US Dollar counterpart as the break above long-term trend resistance hints a cyclical upturn is afoot.

Image of IG Client Sentiment for NZD/USD rate

Meanwhile, the crowding behavior from earlier this year has resurfaced as the IG Client Sentiment report shows 29.88% of traders are current net-long NZD/USD, with the ratio of traders short to long standing at 2.35 to 1. The number of traders net-long is 6.04% higher than yesterday and 8.96% lower from last week, while the number of traders net-short is 5.62% lower than yesterday and 2.72% higher from last week.

The decline in net-long position comes as NZD/USD falls back from the monthly high (0.6724), while the rise in net-short interest has generated a further tilt in retail sentiment as 40.50% of traders were net-long the pair during the previous week.

The crowding behavior may keep NZD/USD within a broad range ahead of the major event risks in November as it flops ahead of the September high (0.6798), but the US Dollar may continue to show an inverse relationship with investor confidence as the Federal Reserve’s balance sheet climbs to a fresh record high in October.

With that said, NZD/USD may attempt to test the October low (0.6547) if the shift in risk appetite turns into a flight to safety, and the Relative Strength Index (RSI) may highlight a similar dynamic should the indicator fail to retain the upward trend carried over from the end of September.

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) may turn out to be an exhaustion in the bullish trend rather than a change in NZD/USD behavior amid the failed attempt to break/close below the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • The RSI highlights a similar dynamic as it reverses course ahead of oversold territory and breaks out of the downward trend carried over from the previous month.
  • Lack of momentum to test the August low (0.6489) pushed NZD/USD back above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region, with the exchange rate clearing the opening range for October as it climbed to a fresh monthly high (0.6724).
  • However, NZD/USD appears to have reversed course ahead of the September high (0.6798) amid the lack of momentum to break/close above the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion), with a move below the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region bringing the 0.6550 (50% expansion) area on the radar, which largely lines up with the October low (0.6547).
  • The RSI may highlight a similar dynamic should the indicator fail to retain the upward trend carried over from the end of September, but failure to break trendline support would undermine the recent decline in NZD/USD as the indicator recovers from its lowest reading since April.

--- 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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