New Zealand Dollar Outlook:
- The major NZD-crosses are on the verge of tallying fresh monthly closing highs.
- Momentum indicators have confirmed that short-term bottoms were recently established in both NZD/JPY and NZD/USD rates.
- According to the IG Client Sentiment Index, the New Zealand Dollar still has a bearish bias in the near-term.
High Beta Higher Still
Risk assets have had a December to remember, with US equity markets closing out the month at or near all-time highs. Like other growth-linked assets around the globe, the New Zealand Dollar has continued to benefit from a resurgence in risk appetite as concerns around the COVID-19 omicron variant have further subsided: even as infection rates have climbed, hospitalizations and deaths remain incredibly low, suggesting that the impact to economic growth won’t be nearly as disruptive or severe as initially feared.
As noted last week, “technical developments in NZD/JPY and NZD/USD rates are implying that short-term bottoms may have been established.” Indeed, with both major NZD-crosses on the verge of establishing fresh monthly closing highs, evidence has accumulated that both pairs have bottomed for the foreseeable futures.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 1)
Last week it was noted that “a double bottom may have been established during this month, and now NZD/JPY rates are on the verge of closing above their daily 21-EMA – the one-month moving average – for the first time since November 18…it appears that NZD/JPY rates may have further room to run higher towards 78.60 by the end of the year.” At the time of writing, NZD/JPY rates were trading at 78.61.
The pair has now moved back above the ascending trendline from the March 2020 and August 2021 lows, further reinforcing the view that a false bearish breakdown occurred at the end of November/beginning of December. With NZD/JPY rates above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order, daily MACD beginning to climb through its signal line, and daily Slow Stochastics holding in overbought territory, it appears likely that “a return back towards the highs above 82.00” will play out “sometime in early-2022.”
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 2)
Similarly last week, it was observed that NZD/USD rates are “also on the verge of closing above its daily 21-EMA for the first time since November 9 – an indication that the December lows have been established.” With the daily 21-EMA slope now positive, momentum has shifted bullish, reinforcing the view that “a return to the descending trendline from the February and May swing highs above 0.6900” may soon develop.
IG Client Sentiment Index: NZD/USD RATE Forecast (December 30, 2021) (Chart 3)
NZD/USD: Retail trader data shows 64.80% of traders are net-long with the ratio of traders long to short at 1.84 to 1. The number of traders net-long is 1.87% higher than yesterday and 1.06% higher from last week, while the number of traders net-short is 8.41% lower than yesterday and 2.36% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZD/USD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
