New Zealand Dollar Talking Points
NZD/USDattempts to break out of the descending channel formation from earlier this year as it trades to a fresh monthly high (0.7233), and the pullback from the January high (0.7315) may turn out to be an exhaustion in the broader trend rather than a change in market behavior as key market themes remain in place.
NZD/USD Clears February Opening Range Amid Rebound Off of 50-Day SMA
NZD/USD trades within the January range asit extends the advance following the US Non-Farm Payrolls (NFP) report, but the rebound off of the 50-Day SMA (0.7140) may gather pace as the exchange rate clears the opening range for February.
NZD/USD appears to be adhering to swings in risk appetite as major central banks rely on their emergency tools to achieve their policy targets, and the US Dollar may continue to reflect an inverse relationship with investor confidence as the Federal Reserve retains the current course for monetary policy and pledges to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”
The Reserve Bank of New Zealand (RBNZ) seems to be following a similar path after unveiling the Funding for Lending Programme (FLP) at its last meeting for 2020, and the central bank may continue to endorse a dovish forward guidance at its next interest rate decision on February 24 as Governor Adrian Orr and Co. “remain prepared to provide additional support if necessary.”
In turn, it remains to be seen if the pullback from the January high (0.7315) will turn out to be an exhaustion in the broader trend rather than a change in market behavior as key market themes remain in place, and the tilt in retail sentiment also looks poised to persist as traders have been net-short the pair since October.
The IG Client Sentiment report shows 36.72% of traders are net-long NZD/USD, with the ratio of traders short to long standing at 1.72 to 1. The number of traders net-long is 26.73% higher than yesterday and 8.27% higher from last week, while the number of traders net-short is 6.52% higher than yesterday and 2.67% lower from last week.
The rise in net-long interest comes as NZD/USD extends the advance following the US NFP report, while the decline in net-short interest has helped to alleviate the tilt in retail sentiment as only 34.28% of traders were net-long the pair during the previous week.
With that said, NZD/USD may make further attempts to break out of the descending channel formation from earlier this year as the US Dollar still reflects an inverse relationship with investor confidence, and the rebound off of the 50-Day SMA (0.7140) may gather pace as the exchange rate clears the opening range for February.
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NZD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, NZD/USD cleared the June 2018 high (0.7060) in December as it climbed to a fresh yearly highs throughout the month, with the Relative Strength Index (RSI) pushing into overbought territory during the same period as the oscillator established an upward trend in the second half of 2020.
- NZD/USD took out the 2020 high (0.7241) during the first week of January to come up against the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion), with the bullish price action pushing the RSI into overbought territory.
- However, the move above 70 in the RSI was short lived as the indicator failed to retain the upward trend carried over from 2020, with the oscillator indicating a textbook sell signal during the first week of January as it quickly fell back from overbought territory.
- Nevertheless, NZD/USD continues to respond to the 50-Day SMA (0.7140) after failing to test last month’s low (0.7096), and the exchange rate may continue to track the January range amid the lack of momentum to push below the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion).
- Still need a move break/close back above the 0.7260 (78.6% expansion) region to bring the topside targets back on the radar as NZD/USD attempts to break out of the descending channel formation from earlier this year, with the next hurdle coming in around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion).
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— Written by David Song, Currency Strategist
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