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NZD/USD Rate Susceptible to Larger Pullback on RSI Sell Signal

NZD/USD Rate Susceptible to Larger Pullback on RSI Sell Signal

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD fails to retain the opening range for December as it trades to a fresh monthly low (0.7006), and looming developments in the Relative Strength Index (RSI) may offer a textbook sell signal if the oscillator falls back from overbought territory and slips below 70.

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NZD/USD Rate Susceptible to Larger Pullback on RSI Sell Signal

NZD/USDextends the series of lower highs and lows from the yearly high (0.7104) as the US Dollar appreciates on the back of waning investor confidence, but the break above the June 2018 high (0.7060) instills a constructive outlook for the exchange rate as key market trends look poise to persist over the remainder of the year.

In turn, swings in risk appetite may continue to sway NZD/USD ahead of the Federal Reserve interest rate decision on December 16, and it remains to be seen if fresh updates coming out of Asia/Pacific will influence the exchange rate amid fears of a protracted recovery.

Image of DailyFX economic calendar for China

The update to China’s Consumer Price Index (CPI) is expected to show the headline reading for inflation holding flat in November after expanding 0.5% per annum the month prior, and signs of subdued price growth may become a growing concern for major central banks as they rely on their non-standard tools to achieve their policy targets.

In turn, the Reserve Bank of New Zealand (RBNZ) may keep the door open to implement a negative interest rate policy (NIRP) as Governor Adrian Orr and Co. warn that “inflation andemployment will remain below the remit targets for a prolonged period,” and the central bank may continue to strike a dovish forward guidance at its next meeting on February 23, 2021 even as Deputy Governor Geoff Bascandreveals that the board plans to issue a decision regarding loan-to-value ratio (LVR) restrictions in February 2021.

Until then, key market trends may influence NZD/USD as the US Dollar broadly reflects an inverse relationship with investor confidence, and the New Zealand Dollar may continue outperform the Greenback even though the crowding behavior from earlier this year resurfaces.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 26.65% of traders are net-long with the ratio of traders short to long at 2.75 to 1. The number of traders net-long is 1.32% higher than yesterday and 0.86% lower from last week, while the number of traders net-short is 0.16% higher than yesterday and 5.38% lower from last week.

The decline in net-short position could be a function of profit-taking behavior as NZD/USD bounces back from a fresh monthly low (0.7006), while the small adjustments in net-long interest has done little to alleviate the tilt in retail sentiment as 26.64% of traders were net-long the pair at the end of November.

With that said, swings in risk appetite may continue to sway NZD/USD as key market trends look poised to persist throughout the remainder of the year, but the Relative Strength Index (RSI) may offer a textbook sell signal if the oscillator falls back from overbought territory and slips below 70.

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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 September 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) in November, which pushed the RSI into overbought territory for the first time since June.
  • NZD/USD also cleared the June 2018 high (0.7060) as it climbed to a fresh yearly high (0.7104) in December, and the exchange rate may continue to appreciate as long as the RSI holds above 70 like the behavior seen in June.
  • Nevertheless, looming developments in RSI may offer a textbook sell signal for NZD/USD if the oscillator falls back from overbought territory and slips below 70 amid the string of failed attempts to break/close above the 0.7080 (61.8% expansion) to 0.7140 (50% expansion) region.
  • In turn, the recent series of lower highs and lows may push NZD/USD back towards the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6980 (78.6% expansion), with the next area of interest coming in around 0.6850 (38.2% expansion) to 0.6870 (50% retracement).
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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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