New Zealand Dollar Outlook:
- The major NZD-crosses have been hit hard, a knock-on effect from China’s entrenched zero-COVID strategy.
- Despite sharp losses in recent weeks, technical support looms nearby for both NZD/JPY and NZD/USD rates.
- According to the IG Client Sentiment Index, the New Zealand Dollar has a bullish bias in the near-term.
The New Zealand Dollar has been brutalized since the start of 2Q’22. What happened? It’s not the Reserve Bank of New Zealand, which still retains extremely hawkish expectations through the end of 2022. Nor can you point a finger at New Zealand’s terms of trade, as commodity prices – dairy and grains – have remained relatively firm over the past six weeks. Instead, the root cause for the Kiwi’s underperformance may be China, New Zealand’s largest trading partner.
China’s insistence on continuing its zero-COVID strategy is wreaking havoc on global supply chains, and in turn provoking a repricing of assets tied to the Chinese economy. Much like the Australian Dollar, which has seen its own streak of significant losses, the New Zealand Dollar may be struggling because of the expected string of disappointing that may soon emerge as a result of reduced Chinese demand for foreign goods – like those from New Zealand.
But the selling may soon find a reprieve. The charts suggest that significant technical levels loom nearby in both NZD/JPY and NZD/USD rates, that soon may offer traders a chance to trade a short-term bottom.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2022) (CHART 1)
Momentum remains bearish at present time for NZD/JPY rates. The pair is still below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is now trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. NZD/JPY rates have dropped through the 2021 high as well as the rising trendline from the March 2020 and August 2021 lows around 82.20/52, suggesting that more losses may be on tap in near-term.
But the April 2021 high at 80.18, coupled with a cluster of Fibonacci retracements near 80.77 and 80.85 – the 23.6% retracement of the 2020 low/2021 high range and the 61.8% retracement of the 2014 high/2020 low range, respectively – are not too far away. A drop into the 80s may soon represent a short-term exhaustion point for NZD/JPY rates that could ultimately produce a tradeable bottom.
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2022) (CHART 2)
NZD/USD rates have been hit harder than their NZD/JPY counterpart, thanks to the US Dollar outperforming the Japanese Yen considerably in recent weeks. The pair is closer to reaching a significant cluster of Fibonacci retracements that may serve as an area to look for a short-term bottom: the 23.6% retracement of the 2014 high/2020 low range at 0.6364 and the 61.8% retracement of the 2020 low/2021 high range at 0.6231, respectively.
Daily MACD is trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. While bearish momentum remains strong, with the daily EMA envelope in bearish sequential order, the selling may soon run its course.
IG Client Sentiment Index: NZD/USD RATE Forecast (May 10, 2022) (Chart 3)
NZD/USD: Retail trader data shows 66.10% of traders are net-long with the ratio of traders long to short at 1.95 to 1. The number of traders net-long is 2.35% higher than yesterday and 2.51% lower from last week, while the number of traders net-short is 3.47% higher than yesterday and unchanged from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZD/USD prices may continue to fall.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse higher despite the fact traders remain net-long.
— Written by Christopher Vecchio, CFA, Senior Strategist