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NZD/USD Rate to Eye Fresh 2020 Highs on Overbought RSI Reading

New Zealand Dollar Talking Points

NZD/USDapproaches the monthly high (0.6914) as the US Dollar depreciates against commodity bloc currencies, and the exchange rate may trade to fresh yearly highs over the coming days as the Relative Strength Index (RSI) flirts with overbought territory.

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NZD/USD Rate to Eye Fresh 2020 Highs on Overbought RSI Reading

NZD/USD largely retains the advance following the Reserve Bank of New Zealand’s (RBNZ) last meeting for 2020 as the US Dollar still reflects an inverse relationship with investor confidence, and swings in risk appetite may continue to influence the exchange rate as Governor Adrian Orr and Co. appear to be in no rush to implement a negative interest rate policy (NIRP).

It seems as though the RBNZ will rely on its balance sheet to support the New Zealand economy as the central bank launches a Funding for Lending Program (FLP) and plans to carry out the Large Scale Asset Purchase (LSAP) Programme of up to $100 billion, and the central bank may merely attempt to buy time at its first meeting for 2021 as “the Committee agreed that it remained appropriate for fiscal policy to play the primary role in bolstering economic outcomes.”

In turn, the RBNZ may endorse a wait-and-see approach on February 24 as “economic outcomes had been more resilient than earlier assumed,” and it remains to be seen if Governor Orr and Co. will push interest rates into negative territory as officials “remain prepared to provide additional support if necessary.”

Until then, key market trends are likely to influence NZD/USD as the Federal Reserve’s balance sheet approaches the record high, with retail positioning highlighting a similar dynamic as the crowing behavior from earlier this resurfaces, with traders net-short the pair since the start of October.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows only 27.26% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 2.67 to 1. The number of traders net-long is 8.60% higher than yesterday and 30.32% higher from last week, while the number of traders net-short is 13.24% higher than yesterday and 23.34% higher from last week.

The rise in net-long position comes as NZD/USD approaches the monthly high (0.6914), while the rise in net-short interest has spurred a further tilt in retail sentiment as 29.88% of traders were net-long the pair at the end of October.

With that said, key market trends look poised to persist over the remainder of the month amid the crowding behavior in NZD/USD, and the exchange rate may trade to fresh yearly highs over the coming days if the Relative Strength Index (RSI) pushes into overbought territory to show the bullish momentum gathering pace.

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)turned out to be an exhaustion in the bullish trend rather than a change in NZD/USD behavior following the failed attempt to break/close below the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion).
  • The RSI highlighted a similar dynamic as it reverses course ahead of oversold territory to break out of the bearish formation from September, with the oscillator establishing an upward trend in October.
  • 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 September high (0.6798) earlier this month, which pushed the RSI into overbought territory for the first time since June.
  • Will keep a close eye on the RSI as it flirts with overbought territory, with a move above 70 likely to be accompanied by a further advance in NZD/USD like the behavior seen in June.
  • As a result, NZD/USD may trade to fresh yearly highs if the RSI shows the bullish momentum gathering pace, with the move back above the 0.6850 (38.2% expansion) to 0.6870 (50% retracement) region keeping the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6980 (78.6% expansion) on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong