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NZD/USD Outlook Mired Ahead of RBNZ as RSI Sits in Oversold Territory

New Zealand Dollar Talking Points

NZD/USD attempts to retrace the decline following the US Non-Farm Payrolls (NFP) report, but the exchange rate may face a more bearish fate ahead of the Reserve Bank of New Zealand (RBNZ) meeting as the Relative Strength Index (RSI) sits in oversold territory.

NZD/USD Outlook Mired Ahead of RBNZ as RSI Sits in Oversold Territory

NZD/USD continued to chip away at the correction from the 2019 low (0.6204) as the US NFP report showed the world’s largest economy adding 225K jobs in January versus forecasts for a 165K print.

A deeper look at the report revealed Average Hourly Earnings climbing to 3.1% from a revised 3.0% in December, and the pickup in job/wage growth may keep the Federal Reserve on the sidelines as the central bank insists that the “current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric 2 percent objective.

In turn, the Humphrey-Hawkins testimony with Fed Chairman Jerome Powell may heighten the appeal of the US Dollar if the central bank head endorses a wait-and-see approach in front of US lawmakers, and the Federal Open Market Committee (FOMC) may stick to the same script at the next interest rate decision on March 18 as “there are some signs that global growth may be stabilizing after declining since mid-2018.”

Image of DailyFX economic calendar

At the same time, the Reserve Bank of New Zealand (RBNZ) is widely expected to keep the official cash rate (OCR) at the record-low of 1.00% on February 12, but the central bank may endorse a dovish forward guidance at its first meeting for 2020 amid the weakening outlook for the Asia/Pacific region.

The RBNZ may keep the door to further insulate the New Zealand economy as the update to the employment report showed job growth holding flat in the fourth quarter of 2019 amid projections for a 0.3% rise.

Image of RBNZ interest rate decisions

Signs of a less robust labor market may put pressure on the RBNZ to implement lower interest rates, and Governor Adrian Orr and Co. may continue to emphasize that the board “will add further monetary stimulus if needed” as the International Monetary Fund (IMF) trims its global growth forecast for 2020.

With that said, the RBNZ meeting may generate a bearish reaction in the New Zealand Dollar if the central bank shows a greater willingness to revisit its rate easing cycle, and NZD/USD may face a more bearish fate in 2020 as Federal Reserve officials see US interest rates on hold over the next 12 months.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • The NZD/USD correction from the 2019 low (0.6204) unravels following the failed attempt to test the July high (0.6791), with the exchange rate at risk for a further decline as it clears the December low (0.6426).
  • The Relative Strength Index (RSI) highlights a similar dynamic as the indicator continues to track the downward trend from earlier this year, and the bearish momentum may gather pace as long as the oscillator sits in oversold territory.
  • Waiting for a close below the 0.6400 (61.8% retracement) to 0.6410 (78.6% expansion) region to open up the Fibonacci overlap around 0.6350 (23.6% retracement) to 0.6370 (50% retracement), with the next area of interest coming in around 0.6310 (100% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong