New Zealand Dollar Talking Points
NZD/USD clears the January high (0.7315) ahead of the Reserve Bank of New Zealand (RBNZ) meeting on February 24, and the interest rate decision may do little to curb the appreciation in the exchange rate as the central bank is expected to keep the official cash rate (OCR) at the record low of 0.25%.
NZD/USD Rate Rally Emerges Ahead of RBNZ Interest Rate Decision
NZD/USD continues to carve a series of higher highs and lows as it extends the rebound off of the 50-Day SMA (0.7178), and the exchange rate may trade to fresh 2021 highs over the remainder of the month as the RBNZ appears to be on track to retain the current course for monetary policy.
It seems as though the RBNZ will rely on its balance sheet to support the New Zealand economy after unveiling a Funding for Lending Programme (FLP) at its last meeting for 2020, and Governor Adrian Orr and Co. may endorse a wait-and-see approach for the foreseeable future as “the Committee agreed that it remained appropriate for fiscal policy to play the primary role in bolstering economic outcomes, given the nature of the economic shock.”
At the same time, the RBNZ appears to be in no rush to implement a negative interest rate policy (NIRP) as “members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the Committee’s principles for alternative monetary policy instruments.”
In turn, more of the same from Governor Orr and Co. may keep NZD/USD afloat as the Federal Reserve stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and key market trends may continue to influence the exchange rate as the US Dollar still broadly reflects an inverse relationship with investor confidence.
Meanwhile, the tilt in retail sentiment also looks poised to persist as traders have been net-short NZD/USD since October, with the IG Client Sentiment report showing 32.01% of traders currently net-long the pair as the ratio of traders short to long stands at 2.12 to 1.
The number of traders net-long is 25.56% higher than yesterday and 24.67% lower from last week, while the number of traders net-short is 0.21% lower than yesterday and 4.38% lower from last week. The narrowing in net-short position comes as NZD/USD clears the January high (0.7315), while the decline in net-long interest has spurred a further tilt in retail sentiment as 39.68% of traders were net-long the pair during the previous week.
With that said, the decline from the decline from the January high (0.7315) appears to have be an exhaustion in the broader trend rather than a change in market behavior as NZD/USD trades to fresh 2021 highs, and the exchange rate may extend the rebound off of the 50-Day SMA (0.7178) as the RBNZ appears to be on track to retain the current course for monetary policy.
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NZD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, NZD/USD cleared the June 2018 high (0.7060) in December as it climbed to a fresh yearly highs throughout the month, with the Relative Strength Index (RSI) pushing into overbought territory during the same period as the oscillator established an upward trend in the second half of 2020.
- NZD/USD took out the 2020 high (0.7241) during the first week of January to come up against the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion), with the bullish price action pushing the RSI into overbought territory.
- However, the move above 70 in the RSI was short lived as the indicator failed to retain the upward trend from 2020, with the oscillator indicating a textbook sell signal during the first week of January as it quickly fell back from overbought territory.
- Nevertheless, NZD/USD responded to the 50-Day SMA (0.7178) after failing to test the 2021 low (0.7096), with the exchange rate extending the advance off of the moving average to clear the January high (0.7315).
- The close above 0.7260 (78.6% expansion) has pushed NZD/USD up against the 0.7320 (23.6% expansion) to 0.7350 (23.6% expansion) region, with the next area of interest coming in around 0.7450 (38.2% expansion) to 0.7500 (100% expansion).
- Will keep a close eye on the RSI as it approaches overbought territory, with a move above 70 in the oscillator likely to be accompanied by a further appreciation in NZD/USD like the behavior in 2020.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
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