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NZD/USD Rate Forecast: Textbook RSI Sell Signal Takes Shape

NZD/USD Rate Forecast: Textbook RSI Sell Signal Takes Shape

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USDquickly pulls back from a fresh 2020 high (0.6968) as upbeat data prints coming out of the US economy spark a bullish reaction in the Greenback, and the exchange rate may consolidate over the coming days as the Relative Strength Index (RSI) appears to be falling back from overbought territory.

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NZD/USD Rate Forecast: Textbook RSI Sell Signal Takes Shape

NZD/USD snaps the series of higher highs and lows carried over from late last week as the Purchasing Managers Index (PMI) for US manufacturing unexpectedly improves in November, with the index climbing to 56.7 from 53.4 the month prior despite forecasts for a 53.0 print.

The bullish US Dollar reaction to the data could indicate expectations of seeing the Federal Reserve on the sidelines at its last meeting for 2020, and the central bank may stick to the same script going into the year ahead as Chairman Jerome Powell and Co. vow to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.

However, the Federal Open Market Committee (FOMC) may come under pressure to further support the US economy as Treasury Secretary Steven Mnuchin lays out plans to wind down the emergency lending facilities, and it remains to be seen if the FOMC will reveal a more detailed forward guidance at the December 16 interest rate decision as Chairman Jerome Powell and Co. are scheduled to update the Summary of Economic Projections (SEP).

Until then, key market trends may continue to influence NZD/USD even though the Reserve Bank of New Zealand (RBNZ) implements a Funding for Lending Program (FLP) as Governor Adrian Orr and Co. keep the official cash rate (OCR) at the record low. In turn, swings in risk appetite may sway the exchange rate as the US Dollar broadly reflects an inverse relationship with investor confidence, and the tilt in retail sentiment also looks poised to persist over the coming days as the crowding behavior from earlier this year resurfaces.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows only 22.10% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 3.52 to 1. The number of traders net-long is 20.00% higher than yesterday and 0.99% higher from last week, while the number of traders net-short is 4.20% higher than yesterday and 33.40% higher from last week.

The rise in net-long position comes as NZD/USD trades to fresh yearly highs in November, but the increase in net-short interest has led to a greater tilt in retail sentiment as 26.27% of traders were net-long the pair during the previous week.

With that said, key market trends may keep NZD/USD afloat as the exchange rate cleared the 2019 high (0.6942) earlier this month, but the exchange rate may consolidate going into the end of the month as the Relative Strength Index (RSI) appears to be falling back from overbought territory.

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)turned out to be an exhaustion in the bullish trend rather than a change in NZD/USD behavior as the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion) provided support.
  • The RSI highlighted a similar dynamic as it reverses course ahead of oversold territory to break out of the bearish formation from September, with the oscillator establishing an upward trend in October.
  • 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 September high (0.6798) earlier this month, which pushed the RSI into overbought territory for the first time since June.
  • NZD/USD also cleared the 2019 high (0.6942) as it trades to fresh yearly highs in November, but the exchange rate may consolidate over the coming days as the RSI appears to be falling back from overbought territory and indicates a textbook sell signal.
  • The textbook RSI selling takes shape following the string of failed attempts to break/close above the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6980 (78.6% expansion), with a move below the 0.6850 (38.2% expansion) to 0.6870 (50% retracement) region bringing the 0.6790 (50% expansion) area back on the radar.
  • Need a break/close above the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6980 (78.6% expansion) to open up the 0.7080 (61.8% expansion) to 0.7140 (50% expansion) region.

--- 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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