NZD/USD Rate Rebound Pulls RSI Out of Oversold Territory

New Zealand Dollar Talking Points

NZD/USD extends the rebound from a fresh yearly low (0.6737) to pull the Relative Strength Index (RSI) out of oversold territory, but fresh data prints coming out of the US may drag on the exchange rate as inflation is expected to pick up for the third consecutive month.

NZD/USD Rate Rebound Pulls RSI Out of Oversold Territory

NZD/USD trades to a fresh weekly high (0.6819) as it initiate a series of higher highs and lows, and the exchange rate may stage a larger correction over the coming days if it manages to clear the opening range for December.

It remains to be seen if the update to the US Consumer Price Index (CPI) will influence NZD/USD as the headline reading is expected to increase to 6.8% from 6.2% per annum in October, which would mark the highest reading since December 1981.

The core CPI is anticipated to show a similar dynamic as the index is seen climbing to 4.9% from 4.6% during the same period, and signs of stronger inflation may push the Federal Open Market Committee (FOMC) to adjust the forward guidance for monetary policy as Chairman Jerome Powell strikes a hawkish tone in front of US lawmakers.

In turn, the FOMC may show a greater willingness to normalize monetary policy sooner rather than later as the central bank is slated to update the Summary of Economic Projections (SEP) as its last meeting for 2021, and the fresh projections may keep NZD/USD in a bearish trend if Chairman Powell and Co. see a steeper path for the Fed funds rate.

Until then, NZD/USD may approach the December high (0.6868) as the RSI indicates a textbook buy signal, but the tilt in retail sentiment looks poised to persist even though the exchange rate extends the rebound from the yearly low (0.6737).

The IG Client Sentiment report shows 70.44% of traders are currently net-long NZD/USD, with the ratio of traders long to short standing at 2.38 to 1.

The number of traders net-long is 4.40% higher than yesterday and 10.42% higher from last week, while the number of traders net-short is 7.18% higher than yesterday and 5.03% higher from last week. The rise in net-long position comes as NZD/USD appears to be on track to test the opening range for December, while the rise in net-short interest has done little to alleviate the crowding behavior as 54.01% of traders were net-long the pair during the last full week of November.

With that said, the rebound from the yearly low (0.6737) may turn out to be a correction in the broader trend as the back-to-back rate hikes from the Reserve Bank of New Zealand (RBNZ) does little to shore up NZD/USD, but recent developments in the Relative Strength Index (RSI) raises the scope for a larger rebound in the exchange rate as the oscillator climbs above 30 to indicate a buy signal.

NZD/USD Rate Daily Chart

Source: Trading View

• NZD/USD has registered a fresh 2021 low (0.6737) in December as it failed to defend the August low (0.6805), but the exchange rate appears to be reversing course ahead of the November 2020 low (0.6589) as the Relative Strength Index (RSI) climbs above 30 to indicate a textbook buy signal.
• Lack of momentum to test the 0.6700 (38.2% retracement) to 0.6710 (61.8% expansion) area has pushed NZD/USD back above the 0.6810 (38.2% expansion) region, with a break above the December high (0.6868) bringing the Fibonacci overlap around 0.6940 (50% expansion) to 0.6960 (38.2% retracement) on the radar.
• Next area of interest comes in around the 0.6990 (23.6% retracement), which largely lines up with the 50-Day SMA (0.6998), with a break above the 200-Day SMA (0.7060) opening up the overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion).
• However, failure to close above the 0.6810 (38.2% expansion) region keeps the 0.6700 (38.2% retracement) to 0.6710 (61.8% expansion) area on the radar, with the next area of interest coming in around 0.6640 (23.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong