NZD/USD Rate Eyes September 2020 Low as RSI Sits in Oversold Territory

New Zealand Dollar Talking Points

NZD/USD depreciates for six consecutive days as the Federal Reserve unveils a more detailed exit strategy, and the exchange rate may attempt to test the September 2020 low (0.6512) as the Relative Strength Index (RSI) sits in oversold territory.

NZD/USD Rate Eyes September 2020 Low as RSI Sits in Oversold Territory

NZD/USD clears the November 2020 low (0.6589) as it trades to a fresh yearly low (0.6570), and the oversold reading in the RSI is likely to be accompanied by a further decline in the exchange rate like the price action seen during the previous month.

The weakness in NZD/USD looks poised to persist until the RSI climbs back above 30 to indicate a textbook buy signal, and it seems as though developments coming out of the US will continue to sway the exchange rate amid the limited reaction to the larger-than-expected rise in New Zealand’s Consumer Price Index (CPI).

Nevertheless, heightening price pressures may encourage the Reserve Bank of New Zealand (RBNZ) to further normalize monetary policy as the headline reading for inflation climbs to 5.9% from 4.9% per annum in the fourth quarter of 2021 to mark the highest reading since 1990, and it remains to be seen if the central bank will raise the official cash rate (OCR) at its next meeting on February 23 after delivering back-to-back rate hikes last year.

Until then, NZD/USD may continue to depreciate as it extends the series of lower highs and lows from earlier this week, and the tilt in retail sentiment looks poised to persist as traders have been net-long NZD/USD since mid-November.

The IG Client Sentiment report shows 66.77% of traders are currently net-long NZD/USD, with the ratio of traders long to short standing at 2.01 to 1.

The number of traders net-long is 3.50% lower than yesterday and 2.13% lower from last week, while the number of traders net-short is 9.25% lower than yesterday and 2.83% lower from last week. The decline in net-long interest has done little to alleviate the crowding behavior as 66.10% of traders were net-long NZD/USD earlier this week, while the decline in net-short position comes as the exchange rate trades to a fresh yearly low (0.6570).

With that said, NZD/USD may attempt to test the September 2020 low (0.6512) as the RSI pushes below 30, with the oversold reading in the oscillator likely to be accompanied by a further decline in the exchange rate like the price action seen during the previous month.

NZD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, NZD/USD traded to a fresh 2021 low (0.6701) in December even as the Relative Strength Index (RSI) recovered from oversold territory, with the broader outlook tilted to the downside as both the 50-Day SMA (0.6783) and 200-Day SMA (0.6997) reflect a negative slope.
• NZD/USD now appears to be on track to test the September 2020 low (0.6512) as it clears the November 2020 low (0.6589), but need a break/close below the 0.6570 (61.8% expansion) region to bring the 0.6470 (50% retracement) to 0.6480 (78.6% expansion) area on the radar, with the next zone of interest coming in around 0.6370 (50% retracement) to 0.6430 (78.6% expansion).
• However, lack of momentum to break/close below the 0.6570 (61.8% expansion) region may pull the RSI out of oversold territory, with a move above the 0.6630 (50% expansion) to 0.6640 (23.6% expansion) area opening up the 0.6690 (38.2% expansion) to 0.6710 (61.8% expansion) region.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong