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NZD/USD Breaks Out of Narrow Range Ahead of FOMC Rate Decision

NZD/USD Breaks Out of Narrow Range Ahead of FOMC Rate Decision

David Song,
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New Zealand Dollar Talking Points

NZD/USDbreaks out of the range bound price action from earlier this week on the back of US Dollar weakness, and the Federal Reserve interest rate decision may do little to derail the bullish price action as the central bank relies on its non-standard tools to support the US economy.


NZD/USD Breaks Out of Narrow Range Ahead of FOMC Rate Decision

NZD/USD appears to have reversed course ahead of the 50-Day SMA (0.7096) as it extends the rebound from the monthly low (0.7096), and the pullback from the January high (0.7315) may turn out to be an exhaustion in the broader trend rather than a change in market behavior as the Fed’s balance sheet climbs to a fresh record high in 2021.

In turn, key market themes may continue to sway NZD/USD as long as the Federal Open Market Committee (FOMC) stays on track to “to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month,” and the exchange rate may exhibit a bullish behavior ahead of the Reserve Bank of New Zealand’s (RBNZ) first meeting for 2021 as the US Dollar still reflects an inverse relationship with investor confidence.

It remains to be seen if the RBNZ will continue to endorse a dovish forward guidance after unveiling the Funding for Lending Programme (FLP) at the November meeting as “the Committee agreed that it was prepared to lower the OCR (official cash rate) to provide additional stimulus if required.”

However, the update to New Zealand’s Consumer Price Index (CPI) may keep the RBNZ on the sidelines as “most Committee members agreed that risks to the baseline scenario were less skewed to the downside than they had appeared earlier in the year,” and Governor Adrian Orr and Co. may merely attempt to buy time on February 24 as the central bank carries out the FLP in tandem with the Large Scale Asset Purchase (LSAP) Programme.

Until then, swings in risk sentiment may continue to influence NZD/USD as key market themes remain in place, and it looks as though the tilt in retail sentiment will also persist as the crowding behavior from the first half of 2020 resurfaces.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 33.72% of traders are net-long with the ratio of traders short to long at 1.97 to 1. The number of traders net-long is 8.18% lower than yesterday and 3.95% lower from last week, while the number of traders net-short is 6.89% higher than yesterday and 7.69% higher from last week.

The decline in net-long position could be a function of profit-taking behavior as NZD/USD breaks out ahead of the FOMC rate decision, while the rise in net-short interest suggests the tilt in retail sentiment is likely to persist even though the exchange rate extends the advance from the monthly low (0.7096).

With that said, the pullback from the January high (0.7315) may end up being an exhaustion in the bullish price action rather than a change in trend like the behavior seen in late 2020, and the Fed rate decision may do little to derail the rebound in the exchange rate as long as the central bank retains the current course for monetary policy.

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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 June 2018 high (0.7060) during the previous month as it climbed to a fresh yearly highs throughout December, with the Relative Strength Index (RSI) pushing into overbought territory during the same period as the oscillator established an upward trend in the second half of 2020.
  • NZD/USD took out the 2020 high (0.7241) during the first week of January to come up against the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion), with the bullish price action pushing the RSI into overbought territory.
  • However, the move above 70 in the RIS was short lived as the indicator failed to retain the upward trend carried over from 2020, with the oscillator indicating a textbook sell signal during the first week of January as it quickly fell back from overbought territory.
  • Nevertheless, NZD/USD appears to have reversed course ahead of the 50-Day SMA (0.7096) following the string of failed attempts to push below the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion), with a break/close above the 0.7260 (78.6% expansion) region bringing the 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion) area back on the radar.
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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.