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NZD/USD Rate Holds in January Range Ahead of NZ Employment Report

NZD/USD Rate Holds in January Range Ahead of NZ Employment Report

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USDstill tracks the January range following the Federal Reserve’s first interest rate decision for 2021, and the exchange rate may continue to consolidate ahead of the update to New Zealand’s Employment report amid the failed attempt to test last month’s low (0.7096).

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NZD/USD Rate Holds in January Range Ahead of NZ Employment Report

NZD/USD appears to be stuck in a narrow range after bouncing back from the 50-Day SMA (0.7117), but 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 key market themes remain in place.

Image of DailyFX economic calendar for New Zealand

It remains to be seen if New Zealand’s Employment report will influence the near-term outlook for NZD/USD as job growth is expected to hold flat during the last three-months of 2020 after contracting 0.8% in the third quarter, and the figures may put pressure on the Reserve Bank of New Zealand (RBNZ) to provide additional monetary stimulus as “the Committee agreed that a prolonged economic downturn would make it difficult to achieve its inflation and employment objectives.

As a result, the RBNZ may continue to strike a dovish forward guidance at its next meeting on February 23 as Governor Adrian Orr and Co. insist that “a lower or negative OCR (official cash rate), purchases of foreign assets, and interest rate swaps remain under consideration,” but it seems as though the central bank is in no rush to deploy more unconventional measures as “the Committee agreed that it remained appropriate for fiscal policy to play the primary role in bolstering economic outcomes, given the nature of the economic shock.”

Until then, swings in risk sentiment may sway NZD/USD as the US Dollar still reflects an inverse relationship with investor confidence, and the tilt in retail sentiment also looks poised to 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 34.28% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 1.92 to 1. The number of traders net-long is 9.48% higher than yesterday and 20.13% lower from last week, while the number of traders net-short is 11.95% higher than yesterday and 9.31% lower from last week.

The decline in net-long position comes as NZD/USD tracks the January range, while the drop in net-short interest has helped to alleviate the tilt in retail sentiment as 33.72% of traders were net-long the pair during the previous week.

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, but the exchange rate may consolidate throughout the first week of February amid the failed attempt to test last month’s low (0.7096).

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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) in December as it climbed to a fresh yearly highs throughout the month, 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 RSI 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 has bounced back from the 50-Day SMA (0.7117) following the failed attempt to test last month’s low (0.7096), and the exchange rate may continue to track the January range amid the lack of momentum to push below the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion).
  • Need a move back above the 0.7260 (78.6% expansion) to bring the topside targets back on the radar as NZD/USD appears to be establishing a downward trend, with the next hurdle coming in around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion).
  • Meanwhile, failure to hold above the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion) may push NZD/USD back towards the 0.6930 (23.6% expansion) to 0.6960 (38.2% retracement) region, 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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