NZD/USD Crowding Behavior Persist as RSI Diverges with Price

New Zealand Dollar Talking Points

NZD/USD approaches the monthly high (0.6601) despite signs of crowding behavior in the US Dollar, but the Relative Strength Index (RSI) undermines the resilience in the New Zealand Dollar as the indicator appears to be diverging with price.

NZD/USD Crowding Behavior Persist as RSI Diverges with Price

The New Zealand Dollar has outperformed most of its major counterparts in July as NZD/USD managed to clear the June high (0.6585), and the exchange rate may stay afloat over the coming days as the IG Client Sentiment report continues to reflect crowding behavior in the currency market, with retail traders net-short NZD/USD since May.

The latest update shows 32.19%of traders are net-long NZD/USD versus 31.84% last week, with the ratio of traders short to long at 2.11 to 1.The number of traders net-long is 7.34% higher than yesterday and 10.00% lower from last week, while the number of traders net-short is 9.56% higher than yesterday and 10.85% lower from last week.

The drop on net-long exposure could be attributed to profit taking behavior as NZD/USD approaches the monthly high (0.6601), while the ongoing contraction in net-short interest suggests stop orders are getting triggered as the New Zealand Dollar continues to outperform its US counterpart.

It remains to be seen if the crowding behavior will persist as open interest for NZD/USD narrows 10.58% from the previous week, but current market conditions may keep the exchange rate afloat ahead of the Federal Reserve interest rate decision on July 29 as the central bank pledges to “increase its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace.”

Looking ahead, the Federal Open Market Committee (FOMC) appears to be on track to retain the current policy throughout the remainder of the year as US lawmakers try to nail out another fiscal stimulus program, and thecontraction in the Fed’s balance sheet may prove to be short lived as the central bank relies on its lending facilities as well as its asset purchases to support the US economy.

With that said, current conditions may keep NZD/USD afloat as the crowding behavior in the currency market persists, but recent developments in the Relative Strength Index (RSI) warn of a potential pullback in the exchange rate as the indicatorsnaps the upward trend from March and appears to be reversing course ahead of 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, and the exchange rate may continue to retrace the decline from earlier this year as it takes out the June high (0.6585) during the first full week of July.
  • However, the RSIappears to be diverging with price as the indicator snaps the upward trend from March, with the oscillator failing to produce the extreme readings seen in June even though the exchange rate managed to clear last month’s high (0.6585).
  • Nevertheless, the July high (0.6601) is on the radar for NZD/USD as it extends the advance from earlier this week, but lack of momentum to break/close above the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) may generate range bound conditions as recent developments in the RSI point to a potential shift in market behavior.
  • Failure to hold above the 0.6550 (50% expansion) region may pushed NZD/USD back towards the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion), with the next area of interest coming in around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion), which largely lines up with the July low (0.6440).

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— Written by David Song, Currency Strategist

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