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NZD/USD Tracks Monthly Range Ahead of New Zealand Inflation Report

New Zealand Dollar Talking Points

NZD/USD tracks the monthly range as the Reserve Bank of New Zealand (RBNZ) shows a greater willingness to boost its non-standard measures, but the update to New Zealand’s Consumer Price Index (CPI) may prop up the exchange rate as the headline reading for inflation is expected to recover in the third quarter.

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NZD/USD Tracks Monthly Range Ahead of New Zealand Inflation Report

NZD/USD approaches the monthly low (0.7006) even though RBNZ Governor Adrian Orr warns that the limits on high loan-to-value ratio (LVR) lending could be reestablished as the central bank head insists that there’s “plenty of room” for the board to adjust the Large Scale Asset Purchase (LSAP) Programme, which currently sits at NZ$100 billion.

Governor Orr went onto say that the RBNZ is preparing a monetary stimulus package that “can be highly effective and highly efficient,” while speaking at the Institute of Finance Professionals New Zealand (INFINZ), and it remains to be seen if the RBNZ will make a major announcement at its last meeting for 2020 as the economy recovers from the COVID-19 pandemic.

Image of DailyFX economic calendar for New Zealand

In turn, the update to New Zealand’s CPI may keep Governor Orr and Co. on the sidelines as the headline reading for inflation is projected to increase to 1.7% from 1.5% in the second quarter of 2020, and key market trends may sway NZD/USD ahead of the RBNZ meeting on November 11 as the US Dollar continues to reflect an inverse relationship with investor confidence.

Image of IG Client Sentiment for NZD/USD rate

At the same time, the crowding behavior from earlier this year has resurfaced as the IG Client Sentiment report shows 40.50% of traders net-long NZD/USD, with the ratio of traders short to long standing at 1.47 to 1. The number of traders net-long is 6.99% higher than yesterday and 7.46% higher from last week, while the number of traders net-short is 7.46% lower than yesterday and 13.88% lower from last week.

The rise in net-long position comes as NZD/USD tracks the monthly range, while the decline in net-short interest has helped to alleviate the tilt in retail sentiment as 39.91% of traders were net-long the pair last week. However, the crowding behavior in NZD/USD suggests the pullback from the yearly high (0.6798) could turn out to be an exhaustion in the bullish trend rather than a change in market behavior, and key market themes look poised to persist over the remainder of the month as the Federal Reserve’s balance sheet approaches the peak from June.

With that said, NZD/USD may face range bound conditions as the decline from earlier this week fails to produce a test of the monthly low (0.7006), and an improvement in New Zealand’s CPI may push the exchange rate back towards the monthly high (0.6682) as the Relative Strength Index (RSI) breaks out of the downward trend carried over from September.

NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, NZD/USD cleared the February high (0.6503) in June as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, with the exchange rate taking out the January high (0.6733) in September following the close above the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion).
  • However, lack of momentum to close above the 0.6790 (50% expansion) region pushed NZD/USD below the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), with the RSI slipping to its lowest level since April during the same period.
  • NZD/USD appeared to be on track to test the August low (0.6489) as the RSI established a downward trend in September, but the decline from the 2020 high (0.6798) may turn out to be an exhaustion in the bullish trend rather than a change in NZD/USD behavior amid the failed attempt to break/close below the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • The RSI highlights a similar dynamic as it reverses course ahead of oversold territory and breaks out of the downward trend carried over from the previous month.
  • Lack of momentum to test the August low (0.6489) pushed NZD/USD back above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region, with the exchange rate clearing the opening range for October as it climbed to a fresh monthly high (0.6682).
  • However, NZD/USD tracks the monthly range after failing to close above the 0.6680 (23.6% expansion) region, and the exchange rate may continue to consolidate as it bounces back from the 0.6550 (50% expansion) region.
  • Need a close above the 0.6680 (23.6% expansion) region to open up the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion), with the next area of interest coming in around 0.6790 (50% expansion), which largely lines up with the 2020-high (0.6798).
  • At the same time, failure to hold above the 0.6550 (50% expansion) region may bring the 0.6490 (50% expansion) to 0.6520 (100% expansion) area back on the radar, with the next region of interest coming in around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong