NZD/USD Rate Reversal Takes Shape Ahead of May Low

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New Zealand Dollar Talking Points

NZD/USD appears to have reversed course ahead of the May low (0.7115) as it extends the advance following the US Non-Farm Payrolls (NFP) report, and the exchange rate may continue to retrace the decline from the start of the month as the Reserve Bank of New Zealand (RBNZ) gradually adjusts the forward guidance for monetary policy.

NZD/USD Rate Reversal Takes Shape Ahead of May Low

NZD/USD continues to to negate the head-and-shoulders formation from earlier this year as it trades back above the 50-Day SMA (0.7169), and the exchange rate may stage a larger rebound ahead of the Federal Reserve interest rate decision on June 16 amid the deviating paths for monetary policy.

It seems as though the RBNZ is preparing to shift gears as “the increase in economic activity has been supported by ongoing favourable domestic health outcomes,” and the central bank may continue to adjust its forward guidance over the coming months as Governor Adrian Orr and Co. “expressed greater confidence in their outlook for the economy given the reduced risk of extreme downside shocks to the economy from COVID-19.

It seems as though the RBNZ will continue to change its tone in the second half of the year as “the Committee agreed that the OCR (official cash rate) is the preferred tool to respond to future economic developments in either direction,” and speculation for higher interest rates may keep NZD/USD afloat as the Federal Reserve stays on track to “increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month.”

Nevertheless, the crowding behavior carried over from 2020 appears to be resurfacing amid the recent flip in retail positioning, with the IG Client Sentiment report showing 43.05% of traders net-long NZD/USD as the ratio of traders short to long stands at 1.32 to 1.

The number of traders net-long is 1.79% higher than yesterday and 10.66% lower from last week, while the number of traders net-short is 13.55% higher than yesterday and 0.27% higher from last week. The decline in net-long position comes as NZD/USD retraces the decline from the start of the month, while the rise in net-short interest has reestablished the tilt in retail sentiment as 47.55% of traders were net-long the pair on May 24.

With that said, the decline from the yearly high (0.7465) may turn out to be a correction in the broader trend rather than a key reversal as the crowding behavior from 2020 resurfaces, and the exchange rate may continue to retrace the decline from the start of the month as it appears to have reversed course ahead of the May low (0.7115).

NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • A head-and-shoulders formation materialized in 2021 as NZD/USD slipped below the 50-Day SMA (0.7169) for the first time since November, but the decline from the yearly high (0.7465) may turn out to be a correction in the broader trend rather than a key reversal as the exchange rate trades back above the neckline.
  • The Relative Strength Index (RSI) highlighted a similar dynamic as it reversed ahead of oversold territory to break out of the downward trend from earlier this year, with NZD/USD climbing back above the 50-Day SMA (0.7169) after defending the March low (0.6943) in April.
  • NZD/USD now appears to be defending the May low (0.7115) as it reverses course ahead of the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion), with a move above the 0.7260 (7.86% expansion) region opening up the 0.7320 (23.6% expansion) to 0.7350 (23.6% expansion) area.
  • Next region of interest comes in around 0.7450 (38.2% expansion) to 0.7500 (100% expansion), which lines up with the February high (0.7465), followed by the 0.7570 (50% expansion) area.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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