New Zealand Dollar Talking Points
NZD/USD extends the advance from earlier this month to trade to a fresh 2020 high (0.6945) in November, and recent developments in the Relative Strength Index (RSI) indicate the bullish momentum could gather pace as the oscillator breaks above 70 to push into overbought territory.
NZD/USD Rate Clears 2019 High and Triggers Overbought RSI Reading
NZD/USD clears the 2019 high (0.6942) as the US Dollar still broadly reflects an inverse relationship with investor confidence, and the exchange rate may appreciate throughout the remainder of 2020 as major central banks become increasingly reliant on their unconventional tools to achieve their mandate for monetary policy.
Looking ahead, it seems as though the Reserve Bank of New Zealand (RBNZ) will continue to endorse a dovish forward guidance as officials “remain prepared to provide additional support if necessary,” but it remains to be seen if Governor Adrian Orr and Co. will deploy more non-standard measures after launching a Funding for Lending Program (FLP) at its last meeting for 2020 as the central bank appears to be in no rush to implement a negative interest rate policy (NIRP).
In turn, swings in risk appetite may continue to influence NZD/USD ahead of the next RBNZ meeting on February 24 as the Federal Reserve’s balance sheet approaches a record high, and it seems as though the Federal Open Market Committee (FOMC) will rely on its current set of tools to support the US economy as the central bank shows a greater willingness to extend its lending facilities and vows to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.”
Nevertheless, Chairman Jerome Powell and Co. are likely to endorse a dovish forward guidance at the next interest rate decision on December 16 as “overall economic activity remains well below its level before the pandemic and the path ahead remains highly uncertain,” and key market trends from earlier this year may persist throughout the remainder of 2020 as the crowding behavior in NZD/USD resurfaces.
The IG Client Sentiment report shows only 26.27% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 2.81 to 1. The number of traders net-long is 28.02% higher than yesterday and 41.21% higher from last week, while the number of traders net-short is 0.76% lower than yesterday and 21.34% higher from last week.
The rise in net-long position comes as NZD/USD extends the advance from earlier this month to clear the 2019-high (0.6942), while the rise in net-short interest has spurred a further tilt in retail sentiment as 27.26% of traders were net-long the pair earlier this week.
With that said, key market trends look poised to persist at least over the remainder of the month as the crowding behavior in NZD/USD resurfaces, and recent developments in the Relative Strength Index (RSI) indicate the bullish momentum could gather pace as the oscillator breaks above 70 to push into overbought territory.
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NZD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, NZD/USD cleared the February high (0.6503) in June as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, with the exchange rate taking out the January high (0.6733) in September following the close above the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion).
- However, lack of momentum to close above the 0.6790 (50% expansion) region pushed NZD/USD below the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with the RSI slipping to its lowest level since April during the same period.
- NZD/USD appeared to be on track to test the August low (0.6489) as the RSI established a downward trend in September, but the decline from the 2020 high (0.6798)turned out to be an exhaustion in the bullish trend rather than a change in NZD/USD behavior following the failed attempt to break/close below the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
- The RSI highlighted a similar dynamic as it reverses course ahead of oversold territory to break out of the bearish formation from September, with the oscillator establishing an upward trend in October.
- Lack of momentum to test the August low (0.6489) pushed NZD/USD back above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region, with the exchange rate clearing the September high (0.6798) earlier this month, which pushed the RSI into overbought territory for the first time since June.
- NZD/USD has also cleared the 2019 high (0.6942) as it trades to fresh yearly highs in November, and the exchange rate may continue to appreciate as long as the RSI sits in overbought territory and holds above 70.
- Still need a break/close above the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6980 (78.6% expansion) to open up the 0.7080 (61.8% expansion) to 0.7140 (50% expansion) region.
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— Written by David Song, Currency Strategist
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