NZD/USD Fails to Test January High Ahead of New Zealand Employment

New Zealand Dollar Talking Points

NZD/USD continues to pullback from the July high (0.6716) ahead of New Zealand’s Employment report, which is expected to show the first contraction since 2019, and recent developments in the Relative Strength Index (RSI) suggest the bullish momentum will continue to abate following the string of failed attempt to push into overbought territory.

NZD/USD Fails to Test January High Ahead of New Zealand Employment

NZD/USD initiates a series of lower highs and lows after failing to test the January high (0.6733), and the update to New Zealand’s Employment report may drag on the exchange rate as job growth is expected to contract 2.0% in the second quarter of 2020.

At the same time, the jobless rate is projected to increase to 5.8% from 4.2% during the first three-months of 2020, and the development may force the Reserve Bank of New Zealand (RBNZ) to further support the economy as the central bank remains “prepared to provide additional stimulus as necessary.

It seems as though the RBNZ will retain a dovish forward guidance at its next interest rate decision on August 12 as Deputy Governor Geoff Bascand warns that “it will take some time before we see a full recovery,” and the central bank may keep the door open to implement a negative interest rate policy (NIRP) as Chief Economist Yuong Ha declared that “we’ve given the banking system until the end of the year to get ready so that the option is there for the Monetary Policy Committee in a year’s time.

In turn, speculation for additional monetary support may produce headwinds for the New Zealand Dollar as “the Committee continues to prepare for the use of additional monetary policy tools as needed,” and it remains to be seen if Governor Adrian Orr and Co. will lay out a more detailed path for monetary policy as the central bank pledges to “outline the outlook for the LSAP (Large Scale Asset Purchase) programme and our readiness to deploy alternative monetary policy tools in our August Statement.

Until then, NZD/USD may continue to consolidate as it initiates a series of lower highs and lows from the July high (0.6716), but current market conditions may keep the exchange rate afloat as the crowding behavior in the US Dollar carries into August.

Image of IG Client Sentiment for NZD/USD rate

The IG Client Sentiment report shows retail traders have been net-short NZD/USD since mid-June, with the ratio of traders short to long standing at 1.55 to 1 as 39.25% of traders are net-long the pair. The number of traders net-long is 7.20% lower than yesterday and 17.05% lower from last week, while the number of traders net-short is 11.51% higher than yesterday and 0.59% lower from last week.

The decline in net-long positions could be indicative of profit-taking behavior as NZD/USD pulls back from the July high (0.6716), while the rise in net-short interest suggests the crowding behavior in the US Dollar will persist even though the DXY index plummets for sixth consecutive weeks.

With that said, fresh developments coming out of New Zealand may keep NZD/USD under pressure if the data prints fuel speculation for additional monetary support, and the Relative Strength Index (RSI) may show the bullish momentum unraveling over the coming days as it appears to be reversing course following the string of failed attempt to push 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, but the exchange rate appears to have stalled ahead of the January high (0.6733) as the RSI fails to push into overbought territory this time around.
  • Recent developments in the RSI suggest the bullish momentum will continue to abate following the string of failed attempt to push into overbought territory, and NZD/USD may extend the series of lower highs and lows from the July high (0.6716) amid the lack of momentum to break/close above the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion).
  • As a result, failure to hold above the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region may push NZD/USD back towards 0.6550 (50% expansion), with the next area of interest coming in around 0.6490 (50% expansion) to 0.6520 (100% expansion).

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— Written by David Song, Currency Strategist

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