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NZD/USD Rate Outlook Clouded by Bear Flag Formation

New Zealand Dollar Talking Points

NZD/USD continues to retrace the sharp decline from earlier this month, with the Relative Strength Index (RSI) breaking out of the downward trend from earlier this year, but the recent rebound in the exchange rate may end up being short lived as a bear flag formation continues to take shape.

NZD/USD Rate Outlook Clouded by Bear Flag Formation

NZD/USD extends the rebound from the yearly low (0.5469) despite the nationwide lockdown in New Zealand, and the exchange rate may consolidate over the remainder of the month as the Reserve Bank of New Zealand (RBNZ) takes additional steps to support the economy.

The RBNZ unveiled a new credit facility that “will provide liquidity in exchange for eligible Corporate and Asset-Backed securities,” with Assistant Governor Christian Hawkesbyemphasizing that the central bank “stands ready to act further to ensure markets and the financial system operate in a stable and efficient manner.

Image of RBNZ interst rate decisions

The comments suggest the RBNZ will continue to deploy unconventional tools to curb the weakening outlook for growth as the official cash rate (OCR) sits at a record low of 0.25%, and the central bank may come under pressure to boost the Large Scale Asset Purchase programme (LSAP) as Finance Minister Grant Robertsoninsists that the economic shock from COVID-19 is “going to be significantly worse than the GFC.”

It remains to be seen if Governor Adrian Orr and Co. will announce more non-standard measures ahead of the next policy meeting on May 13 as Mr. Robertson warns that “we cannot save every job and we cannot save every business,” and the RBNZ’s dovish forward guidance may produce headwinds for the New Zealand Dollar as the central bank continues to push monetary policy into uncharted territory.

Nevertheless, NZD/USD may stage a larger rebound over the remainder of the month as the bearish momentum abates, with the Relative Strength Index (RSI) breaking out of the downward trend from earlier this year, but the recent rebound in the exchange rate may end up being short lived as a bear flag formation continues to take shape.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, NZD/USD has failed to retain the range from the second half of 2019 as the decline from earlier this year produced a break of the October low (0.6204), with a ‘death cross’ taking shape in March as the 50-Day SMA (0.6276) crosses below the 200-Day SMA (0.6434).
  • Nevertheless, the break/close above the 0.6000 (100% expansion) to 0.6010 (61.8% expansion) region has pushed NZD/USD towards the Fibonacci overlap around 0.6070 (100% expansion) to 0.6100 (61.8% expansion), with the next area of interest coming in around 0.6170 (50% expansion) to 0.6180 (161.8% expansion).
  • Recent developments in the Relative Strength Index (RSI) warn of a potential shift in NZD/USD behavior as the oscillator breaks out of the downward trend from earlier this year, but the recent rebound in the exchange rate may end up being short lived as a bear flag formation continues to take shape.
  • With that said, need a break of channel support along with a move below the 0.6000 (100% expansion) to 0.6010 (61.8% expansion) region to bring the downside targets back on the radar.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong