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NZD/USD Rate Forecast: Former Support Zone on the Radar

New Zealand Dollar Talking Points

NZD/USD trades to a fresh monthly high (0.6131) even though New Zealand’s Treasury anticipates “a deep contraction in activity in the present June quarter,” and the exchange rate faces a key test as it comes up against the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion).

NZD/USD Rate Forecast: Former Support Zone on the Radar

NZD/USD extends the advance from earlier this month even though New Zealand’s Treasury outlines five different economic scenarios following COVID-19, with the growth rate expected to decline around 13% in Scenario 1, the least restrictive of the scenarios considered.”

Image of New Zealand Treasury forecast

Source: New Zealand Treasury

Recent price action raises the scope for a larger correction as NZD/USD negates a bear flag formation and breaks out of a narrow range, but the weakening outlook for global growth undermines the recent rebound in the exchange rate as it puts pressure on the Reserve Bank of New Zealand (RBNZ) to further support the economy.

The government projection warns “peaks in the unemployment rate vary from around 13% in Scenario 1 to nearly 26% in Scenario 3,” and the nationwide lockdown may force the RBNZ to deploy more non-standard measures even though the central bank adds “$3 billion of Local Government Funding Agency (LGFA) debt to its Large Scale Asset Purchase programme (LSAP).”

Unlike the Reserve Bank of Australia (RBA), the RBNZ may continue to endorse a dovish forward guidance at its next meeting on May 13 as Governor Adrian Orr insists that the central bank “can keep monetary support going for as long as necessary through QE (quantitative easing) and other tools.”

It seems as though the RBNZ will continue to utilize its balance sheet as officials insist that the official cash rate (OCR) will sit at the record low of 0.25%for at least 12 months,” and it remains to be seen if Governor Orr and Co. will continue to push monetary policy into uncharted territory as the central bank plans to “update its economic assessment and the size and scope of the LSAP at its next scheduled meeting.”

With that said, the near-term correction in NZD/USD may continue to evolve ahead of the next RBNZ interest rate decision, but the exchange rate faces a key test as it comes up against the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion).

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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 (0.6185) crosses below the 200-Day SMA (0.6408).
  • The negative slope in both the 50-Day SMA and the 200-Day SMA offer a bearish outlook for NZD/USD, but recent price action raises the scope for a larger correction as the exchange rate negates a bear flag formation and breaks out of a narrow range, while the Relative Strength Index (RSI continues to track the upward trend carried over from the previous month.
  • Break/close above the Fibonacci overlap around 0.6070 (100% expansion) to 0.6100 (61.8% expansion) brings the former support zone around 0.6170 (50% expansion) to 0.6230 (38.2% expansion) on the radar, with the next area of interest coming in around 0.6310 (100% expansion) to 0.6320 (23.6% expansion).
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— Written by David Song, Currency Strategist

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