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NZD/USD March Opening Range Remains Intact Following FOMC, NZ GDP

NZD/USD March Opening Range Remains Intact Following FOMC, NZ GDP

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD struggles to retain the advance following the Federal Reserve interest rate decision amid the ongoing rise in longer-dated US Treasury yields, but the broader outlook remains constructive as the opening range for March remains intact following the failed attempt to test the 20201 low (0.7096).

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NZD/USD March Opening Range Remains Intact Following FOMC, NZ GDP

The update to New Zealand’s Gross Domestic Product (GDP) report appears to have been overshadowed by the Fed rate decision as Chairman Jerome Powell and Co. see the benchmark interest rate sitting near zero through 2023, with the exchange rate tagging a fresh weekly high (0.7269) despite the unexpected contraction in New Zealand’s growth rate.

Image of DailyFX economic calendar for New Zealand

Nevertheless, it remains to be seen if the GDP report will influence the monetary policy outlook as New Zealand contracts 0.9% during the last three months of 2020, with the third quarter reading reflecting a similar dynamic amid a downward revision to +0.2% from an initial print of +0.4%.

Signs of a protracted recovery may put pressure on the Reserve Bank of New Zealand (RBNZ) to further support the economy as the central bank “remains prepared to provide additional monetary stimulus if necessary,” and the central bank may keep the door open to implement a negative interest rate policy (NIRP) as “the operational work to enable the OCR (official cash rate) to be taken negative if required is now completed.

However, it seems as though the RBNZ is in no rush to deploy more unconventional tools as the “Committee agreed that current monetary policy settings were appropriate to achieve its inflation and employment remit,” and Governor Adrian Orr and Co may stick to the sidelines at the next meeting on April 14 as the central bank relies on its balance sheet to achieve its policy targets.

Until then, swings in risk appetite may sway NZD/USD as the US Dollar broadly reflects an inverse relationship with investor confidence, while the tilt in retail sentiment looks poised to persist as traders have been net-short the pair since October.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 39.16% of traders are currently net-long NZD/USD, with the ratio of traders short to long standing at 1.55 to 1.

The number of traders net-long is 4.20% lower than yesterday and 2.33% lower from last week, while the number of traders net-short is 19.59% lower than yesterday and 2.50% lower from last week. The decline in net-long position could be a function of profit-taking behavior as NZD/USD trades to a fresh weekly high (0.7269), while the decline in net-short interest has helped to alleviate the crowding behavior as only 37.82% of traders were net-long the pair earlier this week.

With that said, the pullback from the February high (0.7465) may turn out to be an exhaustion in the broader trend rather than a change in behavior especially as the FOMC retains the current path for monetary policy, but the exchange rate may consolidate through the remainder of week as it tracks the opening rang for March.

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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 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 from 2020, with the oscillator indicating a textbook sell signal during the first week of January as it quickly fell back from overbought territory.
  • A similar development occurred toward the end of February as NZD/USD pulled back from a fresh yearly high (0.7465), but the exchange rate has slipped below the 50-Day SMA (0.7210) for the first time since November to come up against the January low (0.7096).
  • It seems as though the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion) will continue to act as support as NZD/USD defends the 2021 low (0.7096), and the exchange rate may continue to bounce along the 50-Day SMA (0.7210) as the monthly opening range for March remains intact.
  • Still need a close above the 0.7260 (78.6% expansion) region to bring the overlap around 0.7320 (23.6% expansion) to 0.7350 (23.6% expansion) back on the radar, with the next area of interest coming in around 0.7450 (38.2% expansion) to 0.7500 (100% expansion).
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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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