NZD/USD Rate Outlook Hinges on RBNZ Forward Guidance

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New Zealand Dollar Talking Points

NZD/USD trades in a narrow range ahead of the Reserve Bank of New Zealand (RBNZ) interest rate decision on June 24, but the exchange rate may struggle to retain the advance from the start of the month as the Relative Strength Index (RSI) threatens the upward trend carried over from March.

NZD/USD Rate Outlook Hinges on RBNZ Forward Guidance

NZD/USD bounces back ahead of last week’s low (0.6381) as the RBNZ is expected to keep the official cash rate (OCR) at the record low of 0.25%, and the central bank may tame speculation for additional monetary support after expanding the Large Scale Asset Purchase (LSAP) programin May to NZ$60 billion from NZ$33 billion.

Image of DailyFX economic calendar for New Zealand

The RBNZ may soften the dovish forward guidance for monetary as the New Zealand Institute of Economic Research (NZIER) largely anticipates the economic slowdown from COVID-19 to be “followed by a strong rebound,” and hopes for a V-shape recovery may encourage the central bank to retain the current policy in the second half of 2020 as Governor Adrian Orr and Co. “expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers.

In turn, it remains to be seen if the RBNZ will prepare New Zealand households and businesses for a negative interest rate policy (NIRP) as Chief Economist Yuong Ha reveals 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,” and the central bank may largely rely on its balance sheet to support the economy as the NZIER’s Shadow Board reveals that “opponents of a negative OCR consider QE (quantitative easing), as a support to stimulatory fiscal policy, to be a more effective way to support economic activity.

A material adjust in the RBNZ’s forward guidance may spark a bullish reaction in the New Zealand Dollar if the central bank tames speculation for additional monetary support, but more of the same from Governor Orr and Co. may undermine the recent rebound in NZD/USD as theCommittee agreed that it will stand ready to deploy further tools as needed, should the need for stimulus continue to increase.

With that said, bets for a NIRP in New Zealand may drag on NZD/USD as Federal Reserve Chairman Jerome Powell tames bets for negative US interest rates, and recent price action warns of a potential shift in market behavior as the Relative Strength Index (RSI) falls back from overbought territory and threatens the bullish formation from March.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, NZD/USD has failed to retain the range from the second half of 2019 as the decline from earlier this year produced a break of the October low (0.6204), with a ‘death cross’ taking shape in March as the 50-Day SMA (0.6197) crossed below the 200-Day SMA (0.6319).
  • Nevertheless, NZD/USD managed to push above the February high (0.6503) earlier this month as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, but recent developments in the indicator highlight a potential shift in market behavior as the oscillator falls back from overbought territory and threatens trendline support.
  • In turn, the advance from the March low (0.5469) may continue unravel amid the lack of momentum to push above the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion), but recent price action warns of range bound conditions as NZD/USD bounces back ahead of last week’s low (0.6381).
  • Need a break/close below the 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion) region to bring the 0.6370 (50% retracement) region on the radar, with the next area of interest comes in around 0.6310 (100% expansion) to 0.6320 (23.6% expansion), which lines up with the 200-Day SMA (0.6319).

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— Written by David Song, Currency Strategist

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