New Zealand Dollar Talking Points

NZD/USDpulls back from a fresh yearly high (0.7051) as the US Dollar continues to reflect an inverse relationship with investor confidence, but recent developments in the Relative Strength Index (RSI) instill a bullish outlook for the exchange rate as the oscillator sits in overbought territory.

NZD/USD Rate Trades to Fresh 2020 High as RSI Sits in Overbought Zone

NZD/USD appears to have reversed course ahead of the June 2018 high (0.7060) as global equity prices come under pressure ahead of December, and swings in risk appetite may continue to sway the exchange rate as the Federal Reserve is likely to endorse a dovish forward guidance at its last meeting for 2020.

The Federal Open Market Committee (FOMC) Minutes suggests the central bank will keep the door open to further support the US economy in 2021 as the majority of Fed officials “saw the risk that current and expected fiscal support for households, businesses, and state and local governments might not be sufficient to sustain activity levels in those sectors.”

In turn, the FOMC is likely to reiterate its commitment in “using its full range of tools” at the next interest rate on December 16, and it remains to be seen if Chairman Jerome Powell and Co. will unveil a more detailed forward guidance as “most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions.

Until then, key market trends may continue to influence NZD/USD as the FOMC “agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace,” and the New Zealand Dollar may continue outperform its US counterpart even though the crowding behavior from earlier this year resurfaces.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows 26.64% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 2.75 to 1. The number of traders net-long is 16.83% higher than yesterday and 19.12% higher from last week, while the number of traders net-short is 7.21% higher than yesterday and 6.95% lower from last week.

The decline in net-short position comes as NZD/USD extends the advance from the previous week to trade to a fresh yearly high (0.7051), while the rise in net-long interest has helped to alleviate the tilt in retail sentiment as only 22.10% of traders were net-long the pair during the previous week.

With that said, swings in risk appetite may sway NZD/USD over the coming days as the US Dollar broadly reflects an inverse relationship with investor confidence, but recent developments in the Relative Strength Index (RSI) instill a bullish outlook for the exchange rate as the oscillator pushes into overbought territory.

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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 as the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion) provided support.
  • 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.
  • NZD/USD also cleared the 2019 high (0.6942) as it trades to fresh yearly highs ahead of December, and the exchange rate may continue to appreciate as long as the RSI holds above 70 like the behavior seen in June.
  • A break above the June 2018 high (0.7060) may spur a test of the 0.7080 (61.8% expansion) to 0.7140 (50% expansion) region as the RSI sits in overbought territory, with the next area of interest coming in around 0.7210 (38.2% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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