New Zealand Dollar Outlook:
- The Reserve Bank of New Zealand’s abrupt decision to forego a rate hike in August undercut the Kiwi, but signs that normalization will begin as soon as the next policy meeting have increased bullish bets on the NZD-crosses.
- Pullbacks in both NZD/JPY and NZD/USD rates must be viewed in the bigger context: they are nearing bullish breakout levels.
- According to the IG Client Sentiment Index, the New Zealand Dollar has a mixed bias in the near-term.
Kiwi Concerns Fade
When New Zealand entered a “level four lockdown” in mid-August, the Reserve Bank of New Zealand responded by holding back on what was expected to be a sure-thing: rate hike odds suggested a 100% chance of a 25-bps rate hike just days ahead of last month’s meeting. But now that containment of the latest COVID-19 infections appears to be working, rates markets have quickly discounted a 25-bps rate hike arriving as soon as it meets next in October, which has reinvigorated the New Zealand Dollar. What should be a hawkish RBNZ moving forward has both NZD/JPY and NZD/USD rates on the precipice of more significant bullish moves.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (September 2020 to September 2021) (CHART 1)
The pullback in NZD/JPY rates from their July high (78.77) may prove to be a symptom of broader risk trends rather than any weakness in the New Zealand Dollar itself. In the grand scheme of things, the slight dip at the start of September may be nothing more than a bout of profit taking after an exceptionally strong run to close out August. Insofar as the downtrend from the May and August swing highs has been broken, and momentum remains strong (NZD/JPY rates above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order; daily MACD trending higher above its signal line; and daily Slow Stochastics nestled in overbought territory), traders may want to take a ‘buy the dip’ mentality in the pair.
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (September 2020 to September 2021) (CHART 2)
The rejuvenated US Dollar is giving some fits to NZD/USD rates, but like their NZD/JPY counterpart, the pair remains on strong footing overall. After breaking range resistance dating back to mid-June – and already having cleared their July high, unlike NZD/JPY – NZD/USD rates appear positioned to try and break above the descending trendline from the February and May swing highs.
Momentum remains bullish, even as the pair has pulled back to its daily 5-EMA; the daily EMA envelope remains in bullish sequential order. Daily MACD’s move higher has been curtailed but is still pointing up and remains above its signal line, while daily Slow Stochastics are continuing to hold in overbought territory. Like for NZD/JPY, ‘buy the dip’ may be the appropriate approach in NZD/USD.
IG Client Sentiment Index: NZD/USD RATE Forecast (September 8, 2021) (Chart 3)
NZD/USD: Retail trader data shows 30.38% of traders are net-long with the ratio of traders short to long at 2.29 to 1. The number of traders net-long is unchanged than yesterday and 14.02% lower from last week, while the number of traders net-short is 0.74% lower than yesterday and 17.62% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD prices may continue to rise.
Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist