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NZD/USD Bull Flag Formation Unravels as September Opening Range Snaps

NZD/USD Bull Flag Formation Unravels as September Opening Range Snaps

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD slips to a fresh monthly low (0.7006) as it extends the series of lower highs and lows from last week, and the exchange rate may continue to give back the rebound from the yearly low (0.6805) as the bull flag formation from earlier this month unravels.

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NZD/USD Bull Flag Formation Unravels as September Opening Range Snaps

NZD/USD snaps the opening range for September as concerns surrounding Evergrande drag on investor confidence, and a further deterioration in risk appetite may lead to a further decline in the exchange rate as the US Dollar benefits from the flight to safety.

As a result, the US Dollar may continue to outperform its New Zealand counterpart ahead of the Federal Reserve interest rate decision on tap for later this week, and fresh developments coming out of the central bank may keep NZD/USD under pressure if Chairman Jerome Powell and Co. deliver a tentative exit strategy.

Plans to scale back monetary support should prop up the Greenback as Fed officials forecast two rate hikes for 2023, but a more bullish scenario may materialize for the US Dollar if the update to the Summary of Economic Projections (SEP) reflect a steeper path for the federal funds rate.

In turn, NZD/USD may continue to give back the rebound from the yearly low (0.6805) as the bull flag formation from earlier this month failed to transpire, but a further decline in the exchange rate continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 40.51% of traders are currently net-long NZD/USD, with the ratio of traders short to long standing at 1.47 to 1.

The number of traders net-long is 5.91% higher than yesterday and 1.89% higher from last week, while the number of traders net-short is 3.66% lower than yesterday and 29.08% lower from last week. The rise in net-long interest has helped to alleviate the tilt in retail sentiment as 35.19% of traders were net-long NZD/USD last week, while the decline in net-short position comes as the exchange rate slips to a fresh monthly low (0.7006).

With that said, the advance from the August low (0.6805) may turn out to be a correction in the broader trend as NZD/USD trades to fresh yearly lows in the second half of 2021, and the Fed rate decision may undermine the recent recovery in the exchange rate if the central bank shows a greater willingness to normalize monetary policy sooner rather than later.

NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, a head-and-shoulders formation materialized in the first quarter of 2021 as NZD/USD slipped below the 50-Day SMA (0.7006) for the first time since November, with the exchange rate pushing below the 200-Day SMA (0.7116) for the first time since June 2020 to trade to a fresh yearly low (0.6805) in August.
  • However, NZD/USD reversed course ahead of the November 2020 low (0.6589) amid the failed attempt to close below the 0.6810 (38.2% expansion) region, with a bull flag formation taking shape earlier this month as the exchange rate cleared the July high (0.7105).
  • Nevertheless, the continuation pattern has failed to materialize as NZD/USD snaps the opening range for September, with lack of momentum to hold above the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion) pushing the exchange rate towards the 0.6990 (23.6% retracement) region.
  • Next area of interest comes in around 0.6940 (50% expansion) to 0.6960 (38.2% retracement) followed by the 0.6870 (50% retracement) region, with a break of the August low (0.6805) opening up the 0.6700 (38.2% retracement) to 0.6710 (61.8% expansion) area.

--- 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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