New Zealand Dollar Talking Points
NZD/USD trades to a fresh monthly low (0.6660) as it clears the 2021 low (0.6701), but fresh data prints coming out of New Zealand may curb the recent decline in the exchange rate as inflation is anticipated to increase for the fourth consecutive quarter.
NZD/USD Rate Clears 2021 Low Ahead of New Zealand Inflation Report
NZD/USD appears to be on track to test the November 2020 low (0.6589) as it extends the series of lower highs and lows from last week, and the Federal Reserve interest rate decision may keep the exchange rate under pressure as the central bank prepares to normalize monetary policy.
However, the update to New Zealand’s Consumer Price Index (CPI) may spark a bullish reaction in NZD/USD as the headline reading is expected to increase to 5.7% from 4.9% in the fourth quarter of 2021, which would mark the highest reading since 1990, and signs of faster inflation may put pressure on the Reserve Bank of New Zealand (RBNZ) to implement higher interest rates as “the Committee noted that further removal of monetary policy stimulus is expected over time given the medium term outlook for inflation and employment.”
As a result, the RBNZ may retain a hawkish forward guidance at its next meeting on February 23 as “the Committee judged that considered steps in the OCR (official cash rate) were the most appropriate way to continue reducing monetary stimulus for now,” and it remains to be seen if Governor Adrian Orr and Co. will continue to normalize monetary policy over the coming months after delivering back-to-back rate hikes in 2021.
In turn, the New Zealand Dollar may continue to underperform against its US counterpart as the exchange rate pushed to fresh yearly lows in the fourth-quarter of 2021 despite the shift in RBNZ policy, and the tilt in retail sentiment looks poised to persist as traders have been net-long NZD/USD since mid-November.
The IG Client Sentiment report shows 66.10% of traders are currently net-long NZD/USD, with the ratio of traders long to short standing at 1.95 to 1.
The number of traders net-long is 2.01% lower than yesterday and 1.52% lower from last week, while the number of traders net-short is 16.96% higher than yesterday and 5.21% lower from last week. The decline in net-long interest has helped to alleviate the crowding behavior as 65.05% of traders were net-long NZD/USD last week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.6660).
With that said, another uptick in New Zealand’s CPI may help to curb the recent decline in NZD/USD, but the exchange rate may attempt to test the November 2020 low (0.6589) as it extends the series of lower highs and lows from last week.
NZD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, NZD/USD traded to a fresh 2021 low (0.6701) in December even as the Relative Strength Index (RSI) recovered from oversold territory, with the broader outlook tilted to the downside as both the 50-Day SMA (0.6808) and 200-Day SMA (0.70006) reflect a negative slope.
- NZD/USD appears to be on track to test the November 2020 low (0.6589) as it clears the 2021 low (0.6701), with a break/close below the0.6630 (50% expansion) to 0.6640 (23.6% expansion) region opening up the 0.6570 (61.8% expansion) area.
- Next area of interest comes in around 0.6470 (50% retracement) to 0.6480 (78.6% expansion) followed by the Fibonacci overlap around 0.6370 (50% retracement) to 0.6430 (78.6% expansion).
- However, lack of momentum to hold below the 0.6690 (38.2% expansion) to 0.6710 (61.8% expansion) region may push NZD/USD back towards the Fibonacci overlap around 0.6770 (23.% expansion) to 0.6810 (38.2% expansion), which larger lines up with the 50-Day SMA (0.6808), with the next area of interest coming in around 0.6870 (50% retracement).
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong