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New Zealand Dollar Forecast: Just a Flesh Wound - Setups for NZD/JPY, NZD/USD

New Zealand Dollar Forecast: Just a Flesh Wound - Setups for NZD/JPY, NZD/USD

Christopher Vecchio, CFA, Senior Strategist
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New Zealand Dollar Outlook:

  • Theturn through the middle of the month hasn’t been kind to the Kiwi. But that’s not really a surprise, given that May seasonality studies suggested rough waters for the New Zealand Dollar.
  • Pullbacks in both NZD/JPY and NZD/USD rates must be viewed in the bigger context: both pairs remain in their triangle consolidations.
  • According to the IG Client Sentiment Index, the New Zealand Dollar has a mixed bias in the near-term.

New Zealand Dollar’s Wings Clipped

The New Zealand Dollar hasn’t had a great month of May thus far, and shifts across global financial markets in recent days following the April US non-farm payrolls report and the April US consumer price index have catered to a general ‘risk-off’ mood. And while this has left the high beta, growth-sensitive New Zealand Dollar exposed to a near-term pullback, that doesn’t mean that the Kiwi isn’t in good shape longer-term. Technically speaking, both NZD/JPY and NZD/USD rates remain within their triangular consolidations; if the Kiwi’s wings have been clipped, it’s just a flesh wound (and not in the ironic Monty Python sense).

NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2021) (CHART 1)

New Zealand Dollar Forecast: Just a Flesh Wound - Setups for NZD/JPY, NZD/USD

The recent pullback in NZD/JPY rates is fairly insignificant; in fact, it was on Monday this week that the pair just set a fresh yearly high. It thus may be considered that the pair has merely run into ascending triangle resistance and the initial bullish breakout attempt has been rebuffed. Overall, considering that the ascending triangle formed after an uptrend, the expectation is for bullish resolution ultimately. Despite the setback, NZD/JPY rates are pulling back into their daily 5-, 8-, 13-, and 21-EMA envelope, which otherwise remains in bullish sequential order. Daily MACD is narrowing even as it remains in bullish territory, while daily Slow Stochastics are just starting to ease from overbought territory. More losses may materialize within the ascending triangle; a break of the daily 21-EMA could foretell a drop towards 78.00 this week.

NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2021) (CHART 2)

New Zealand Dollar Forecast: Just a Flesh Wound - Setups for NZD/JPY, NZD/USD

Given the uptick in US Treasury yields, NZD/USD rates have proved weaker than their NZD/JPY counterpart. NZD/USD remains below its March and November 2020 uptrend, which constitutes the pandemic trendline. But like NZD/JPY, the pair appears to be consolidating within the confines of a triangle, this version of the symmetrical variety. The preceding move was an uptrend, so resolution to the topside is eyed.

For now, NZD/USD is below its daily 5-, 8-, 13-, and 21-EMA envelope, which is otherwise still in bullish sequential order. Daily MACD is trending lower but remains above its signal line, while daily Slow Stochastics are continuing to pullback from overbought territory. There remains a cluster of support levels nearby: the 50% Fibonacci retracement of the 2014 high/2020 low range at 0.7153; the 76.4% Fibonacci retracement of the 2017 high/2020 low range at 0.7065; the December 2020 low at 0.7006; and symmetrical triangle support thereafter.

IG Client Sentiment Index: NZD/USD RATE Forecast (May 12, 2021) (Chart 3)

New Zealand Dollar Forecast: Just a Flesh Wound - Setups for NZD/JPY, NZD/USD

NZD/USD: Retail trader data shows 36.80% of traders are net-long with the ratio of traders short to long at 1.72 to 1. The number of traders net-long is 8.86% lower than yesterday and 15.29% lower from last week, while the number of traders net-short is 6.08% lower than yesterday and 12.50% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bullish contrarian trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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