NZD/USD Rate Remains Under Pressure as RBNZ Prepares Stimulus Package

New Zealand Dollar Talking Points

NZD/USD continues to pullback from the yearly high (0.6789) as the Reserve Bank of New Zealand (RBNZ) considers “a package of options” to further support the economy, and the New Zealand Dollar may face headwinds ahead of the next central bank meeting on September 22 as Governor Adrian Orr insists “that it is better to risk doing too much too soon, rather than too little too late.

NZD/USD Rate Remains Under Pressure as RBNZ Prepares Stimulus Package

NZD/USD fails to extend the series of lower highs and lows from the previous week despite the kneejerk reaction to the US Non-Farm Payrolls (NFP) report, but recent remarks from the RBNZ appear to be dragging on the New Zealand Dollar as the central bank is “actively preparing a package of additional monetary policy tools to support the economy if required.

The latest speech by Governor Orr suggests the RBNZ will deploy more unconventional tools, which “include negative wholesale interest rates and direct funding to banks,” as the central bank head emphasizes that “the design of the package needs to ensure our monetary policy decisions have their maximum impact.”

Governor Orr went onto say that “our commitment is to clearly communicate our future monetary policy strategies and tools, and when we might use them,” and it remans to be seen if the central bank will reveal a more detailed forward guidance at the September meeting as the RBNZ prepares the banking sector for a negative interest rate policy.

Until then, further hints of a looming shift in the path for monetary policy may continue to drag on the New Zealand Dollar, but current market trends may keep NZD/USD as the crowding behavior in the US Dollar carries into September.

The IG Client Sentiment report shows the retail crowd has been net-short NZD/USD since mid-June, with only 28.44% of traders net-long the pair as the ratio of traders short to long stands at 2.52 to 1. The number of traders net-long is 13.04% higher than yesterday and 12.50% lower from last week, while the number of traders net-short is 13.65% higher than yesterday and 27.93% higher from last week.

The recent rise in net-long position has helped to alleviate the tilt in retail sentiment as only 26.37%of traders were net-long NZD/USD last week, but the rise in net-short interest suggests the crowding behavior will persist even though the Federal Reserve’s balance sheet climbs back above $7 trillion in August.

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 as the exchange rate trades to fresh yearly high (0.6789) in September, but the New Zealand Dollar may face headwinds ahead of the next RBNZ meeting as the central bank appears to be on track to deploy more non-standard measures.

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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 continues to pullback from the yearly high (0.6789) amid the lack of momentum to break/close above the 0.6790 (50% expansion) region, with the exchange rate hovering around the 0.6680 (23.6% expansion) area as the RSI flips ahead of overbought territory.
  • A further decline in NZD/USD may bring the overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) back on the radar, with a break/close below the 0.6550 (50% expansion) region 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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