NZD/USD Rate Selloff Pushes RSI Towards Oversold Territory

New Zealand Dollar Talking Points

NZD/USD tumbles to a fresh monthly low (0.6860) as the bull flag formation from earlier this month continues to unravel, and looming developments in the Relative Strength Index (RSI) may indicate a further decline in the exchange rate if the oscillator pushes into oversold territory for the first time since March 2020.

NZD/USD Rate Selloff Pushes RSI Towards Oversold Territory

NZD/USD extends the series of lower highs and lows from earlier this week on the back of US Dollar strength, and the exchange rate may continue to give back the rebound from the yearly low (0.6805) as market participants brace for an imminent shift in Federal Reserve policy.

Recent remarks from Fed Chairman Jerome Powell suggest the Federal Open Market Committee (FOMC) is on track to normalize monetary policy as “growth is widely expected to continue at a strong pace in the second half,” with the central bank head telling US lawmakers that “we are seeing upward pressure on prices, particularly due to supply bottlenecks in some sectors.”

As a result, Chairman Powell acknowledged that the factors fueling inflation “have been larger and longer lasting than anticipated,” and it seems as though the FOMC will continue to change its tone over the coming months as the central head pledges to“use our tools to ensure that inflation runs at levels that are consistent with our goal.”

In turn, NZD/USD may continue to trade to fresh yearly lows in the second half of 2021 as signs of sticky inflation puts pressure on the FOMC to normalize monetary policy sooner rather than later, but a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 56.74% of traders are currently net-long NZD/USD. with the ratio of traders long to short standing at 1.31 to 1.

The number of traders net-long is 9.58% higher than yesterday and 18.45% higher from last week, while the number of traders net-short is 12.81% lower than yesterday and 28.46% lower from last week. The rise in net-long interest has fueled the flip in retail sentiment as 40.51% of traders were net-long NZD/USD last week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.6860).

With that said, the rebound from the August low (0.6805) may turn out to be a correction in the broader trend as the bull flag formation from earlier this month failed to transpire, and looming developments in the Relative Strength Index (RSI) may indicate a further decline in the exchange rate if the oscillator pushes into oversold territory for the first time since March 2020.

NZD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, a head-and-shoulders formation materialized in the first quarter of 2021 as NZD/USD slipped below the 50-Day SMA (0.7009) for the first time since November, with the exchange rate pushing below the 200-Day SMA (0.7112) for the first time since June 2020 to trade to a fresh yearly low (0.6805) in August.
• However, NZD/USD reversed course ahead of the November 2020 low (0.6589) amid the failed attempt to close below the 0.6810 (38.2% expansion) region, with a bull flag formation taking shape earlier this month as the exchange rate cleared the July high (0.7105).
• Nevertheless, the continuation pattern has failed to materialize as NZD/USD snapped the opening range for September, with the break below the Fibonacci overlap around 0.6940 (50% expansion) to 0.6960 (38.2% retracement) pushing the exchange rate up against the 0.6870 (50% retracement) region.
• Need a close below the 0.6870 (50% retracement) region to open up the 0.6810 (38.2% expansion) area, with a break of the August low (0.6805) opening up the 0.6700 (38.2% retracement) to 0.6710 (61.8% expansion) area.
• Looming developments in the Relative Strength Index (RSI) may indicate a further decline in NZD/USD as it approaches oversold territory, with a break below 30 in the oscillator likely to be accompanied by a further deprecation in the exchange like the behavior seen in March 2020.
• At the same time, lack of momentum to close below the 0.6870 (50% retracement) region may push NZD/USD back towards the overlap around 0.6940 (50% expansion) to 0.6960 (38.2% retracement), with the next area of interest coming in around 0.6990 (23.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong