NZD/USD Rate Rebound Mired by RSI Sell Signal

New Zealand Dollar Talking Points

NZD/USD struggles to retain the advance from the start of the week following an unexpected improvement in US household sentiment, with the Relative Strength Index (RSI) indicating a larger pullback in the exchange rate as it falls back from overbought territory to offer a textbook sell signal.

NZD/USD Rate Rebound Mired by RSI Sell Signal

NZD/USD looks poised to test the monthly high (0.7219) as it carves a fresh series of higher highs and lows, but the update to the Conference Board’s Consumer Confidence survey appears to be dragging on the exchange rate as the index climbs to 113.8 from 109.8 in October versus forecasts for a 108.3 print.

Looking ahead, it remains to be seen if the data prints on tap for later this week will generate a similar reaction as Durable Goods Orders are projected to contract 1.1% in September, while the advance US Gross Domestic Product (GDP) report is anticipated to show the economy growing 2.7% in third quarter of 2021 after expanding 6.7% per annum during the previous period.

A batch of mixed developments may produce headwinds for the US Dollar as it puts pressure on the Federal Reserve to delay its exit strategy, and NZD/USD may stage a larger advance ahead of the Federal Open Market Committee (FOMC) interest rate decision on November 3 if the data prints dampen speculation for an imminent shift in monetary policy.

In turn, a test of the monthly high (0.7219) remains in reach as NZD/USD carves a fresh series of higher highs and lows, but a further advance in the exchange rate may fuel the tilt in retail sentiment like the behavior seen during the previous month.

The IG Client Sentiment report shows only 38.73% of traders are currently net-long NZD/USD, with the ratio of traders short to long standing at 1.58 to 1.

The number of traders net-long is 23.23% higher than yesterday and 2.95% higher from last week, while the number of traders net-short is 1.53% lower than yesterday and 12.87% higher from last week. The rise in net-long position comes as NZD/USD attempts to retrace the decline from the monthly high (0.7219), while the jump in net-short interest has fueled the crowding behavior as 39.77% of traders were net-long the pair last week.

With that said, NZD/USD may stay afloat ahead of the next Fed rate decision as fresh data prints coming out of the US are anticipated to show a less robust recovery, but recent developments in the Relative Strength Index (RSI) raises the scope for a larger pullback in the exchange rate as the oscillator falls back from overbought territory to offer a textbook sell signal.

NZD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, a head-and-shoulders formation materialized in the first quarter of 2021 as NZD/USD slipped below the 50-Day SMA (0.7020) for the first time since November, with the exchange rate pushing below the 200-Day SMA (0.7098) for the first time since June 2020 to trade to a fresh yearly low (0.6805) in August.
• Nevertheless, NZD/USD reversed course ahead of the November 2020 low (0.6589) amid the failed attempt to close below the 0.6810 (38.2% expansion) region, with a break above the monthly high (0.7219) opening up the 0.7260 (78.6% expansion) region.
• However, the recent advance in NZD/USD appears to be stalling ahead of the June high (0.7288) as the Relative Strength Index (RSI) falls back from overbought territory to offer a textbook sell signal, and lack of momentum to test the 0.7260 (78.6% expansion) region may push the exchange rate back towards the towards the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion), with a move below the 50-Day SMA (0.7020) opening up the 0.6990 (23.6% retracement) area.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong