NZD/USD Rate Vulnerable Following RBNZ as RSI Snaps Bullish Formation

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New Zealand Dollar Talking Points

NZD/USD pares the rebound from earlier this week as the Reserve Bank of New Zealand (RBNZ) emphasizes that “the Monetary Policy Committee is prepared to provide additional stimulus as necessary,” and the exchange rate may continue to give back the advance from the start of the month as the Relative Strength Index (RSI) snaps the upward trend carried over from March.

NZD/USD Rate Vulnerable Following RBNZ as RSI Snaps Bullish Formation

NZD/USD continues to pullback from the weekly high (0.6533) even though the RBNZ keeps the official cash rate (OCR) at the record low of 0.25% as the “Committee continues to prepare for the use of additional monetary policy tools as needed.

Image of RBNZ interest rate decisions

Source: RBNZ

It remains to be seen if the RBNZ will implement more non-standard measures over the coming months 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,” but it seems as though Governor Adrian Orr and Co. will continue to endorse a dovish forward guidance in the second half of 2020 as “the Committee agreed that it is not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate.

In turn, the RBNZ may keep the door open to implement 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 speculation for another round of rate casts a bearish outlook for NZD/USD as Federal Reserve Chairman Jerome Powell tames bets for negative US interest rates

At the same time, the RBNZ warns that “the appreciation of New Zealand’s exchange rate has placed further pressure on export earnings,” with officials notingthat the exchange rate has appreciated since the May Statement, dampening the outlook for inflation and reducing returns for New Zealand exports.

The comments suggest the RBNZ will pay increased attention to the New Zealand Dollar as “the Committee agreed that current disruptions to supply chains and international travel – including tourism – will persist and constrain growth and employment,” and Governor Orr and Co. may make further attempts to jawbone the local currency in an effort to achieve the dual mandate for price stability and full employment.

As a result, NZD/USD may continue to give back the advance from the start of the month following the reaction to the RBNZ meeting, with the Relative Strength Index (RSI) highlighting a potential shift in market behavior as the oscillator snaps the upward trend carried over 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 (0.6214) 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 snaps 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 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) area on the radar.
  • 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), followed by the Fibonacci overlap around 0.6170 (50% expansion) to 0.6230 (38.2% expansion).

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— Written by David Song, Currency Strategist

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