NZD/USD Pulls Back from 2020 High as RBNZ Outlines Future Policy Tools

New Zealand Dollar Talking Points

NZD/USD pulls back from a fresh yearly high (0.6789) as the Reserve Bank of New Zealand (RBNZ) warns that the economic repercussion from the COVID-19 pandemic “will be severe and long-lasting,”, and the exchange rate may face a larger pullback over the coming days as the Relative Strength Index (RSI) flips ahead of overbought territory.

NZD/USD Pulls Back from 2020 High as RBNZ Outlines Future Policy Tools

NZD/USD initiates a series of lower highs and lows after taking out the January high (0.6733) as RBNZ Governor Adrian Orr strikes a dovish outlook for monetary policy, with the central bank head providing an overview of the “additional tools that we are considering using as a package in the near future.”

Governor Orr states that “the instruments include various forms of negative wholesale interest rates, further quantitative easing using large scale purchases of domestic and foreign assets, direct lending to banks, and forward guidance,” and it seems as though the Monetary Policy Committee (MPC) will continue to deploy more non-standard tools after expanding the Large Scale Asset Purchase (LSAP) program to NZ$ 100B in August asthe central bank keeps the door open to implement a negative interest rate policy (NIRP).

It remains to be seen if the RBNZ will take additional steps to support the New Zealand economy as Governor Orr insists that “it was better to risk doing too much too soon, than too little, too late, but the MPC may stick to the status quo at the next meeting on September 22 as the central bank head pledges to “outline our future monetary policy strategies and tools, and when we might use them.”

In turn, the RBNZ may gradually alter the forward guidance over the coming months, and speculation for additional monetary support is likely to produce headwinds for the New Zealand Dollar as the central bank ventures into uncharted territory.

Until then, current market trends may keep NZD/USD afloat as the Federal Reserve appears to be in no rush to scale back its emergency measures, and the crowding behavior in the US Dollar looks poised to persist as retail traders have been net-short the pair since mid-June.

The IG Client Sentiment report shows only 26.37% of traders are net-long NZD/USD, with the ratio of traders short to long at 2.79 to 1. The number of traders net-long is 14.65% lower than yesterday and 7.65% lower from last week, while the number of traders net-short is 10.02% higher than yesterday and 19.19% higher from last week.

The decline in net-long position could be an indication of profit-taking behavior as NZD/USD pulls back from a fresh yearly high (0.6789), while the rise in net-short interest suggests the tilt in retail sentiment will persist even though the exchange rate takes out the January high (0.6733) in September.

With that said, the recent weakness in NZD/USD may prove to be an exhaustion in the bullish price action rather than a change in trend, but the exchange rate may face a larger pullback over the coming days as the Relative Strength Index (RSI) 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, 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, NZD/USD initiates a series of lower highs and lows from the fresh yearly high (0.6789) as the RSI fails to reflect the extreme reading seen in June even though the indicator breaks out of the downward trends carried over from earlier this year.
  • Lack of momentum to break/close above the 0.6790 (50% expansion) region has pushed NZD/USD back below the overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion), with the exchange rate coming up against the 0.6680 (23.6% expansion) area as the RSI flips ahead of overbought territory.
  • A further decline in NZD/USD may bring the 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) region back on the radar, with a break/close below 0.6550 (50% expansion) opening up the 0.6490 (50% expansion) to 0.6520 (100% expansion) area, which largely lines up with the August low (0.6489).

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— Written by David Song, Currency Strategist

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