NZD/USD Rebound Eyes Former Support Zone

New Zealand Dollar Talking Points

NZD/USD extends the series of higher highs and lows from the start of the week after showing a limited reaction to New Zealand’s Employment report, but the rebound from the January low (0.6529) may turn out to be a correction in the broader trend if the former support zone around the December low (0.6701) acts as resistance.

New Zealand Dollar Forecast: NZD/USD Rebound Eyes Former Support Zone

Recent price action raises the scope for a larger rebound in NZD/USD as the Relative Strength Index (RSI) climbs out of oversold territory to reflect a textbook buy signal, and the exchange rate may continue to retrace the decline from the January high (0.6891) as the bearish reaction to the Federal Reserve interest rate decision unravels.

However, NZD/USD may exhibit a bearish trend in 2022 as the back-to-back rate hikes from the Reserve Bank of New Zealand (RBNZ) did little to keep the exchange rate afloat, and it remains to be seen if Governor Adrian Orr and Co. will continue to lift the official cash rate (OCR) at the next meeting on February 23 as the central bank insists that “further removal of monetary policy stimulus is expected over time given the medium term outlook for inflation and employment.”

Until then, developments coming out of the US may sway NZD/USD as the Non-Farm Payrolls (NFP) report is anticipated to show the economy adding 150K jobs in January, and a further improvement in the labor market may generate a bullish reaction in the Greenback as it puts pressure on the Federal Open Market Committee (FOMC) to normalize monetary policy sooner rather than later.

In turn, the rebound from the January low (0.6529) may turn out to be a correction in the broader trend as the FOMC looks to winddown its balance sheet in 2022, 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 65.56% of traders are currently net-long NZD/USD, with the ratio of traders long to short standing at 1.90 to 1.

The number of traders net-long is 5.83% lower than yesterday and 0.93% higher from last week, while the number of traders net-short is 25.14% higher than yesterday and 0.44% higher from last week. The marginal rise in net-long position comes as NZD/USD extends the series of higher highs and lows from the start of the week, while the rise in net-short interest has helped to alleviate the crowing behavior as 66.10% of traders were net-long the pair last week.

With that said, NZD/USD may stages a larger rebound over the coming days as recent advance in the exchange rate pulls the RSI out of oversold territory, but the rebound from the January low (0.6529) may turn out to be a correction in the broader trend if the former support zone around the December low (0.6701) acts as resistance.

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 (0.6764) and 200-Day SMA (0.6988) reflect a negative slope.
• Nevertheless, NZD/USD appears to have reversed course ahead of the September 2020 low (0.6512) as the recent rebound in the exchange rate pulls the RSI out of oversold territory, but need a close above the 0.6630 (50% expansion) to 0.6640 (23.6% expansion) region to bring the former-support zone around 0.6690 (38.2% expansion) to 0.6710 (61.8% expansion) on the radar.
• Next area of interest comes in around 0.6770 (23.% expansion) to 0.6810 (38.2% expansion), which larger lines up with the 50-Day SMA (0.6764), but the rebound from the January low (0.6529) may turn out to be a correction in the broader trend if the former support zone around the December low (0.6701) acts as resistance.
• Failure to test the 0.6690 (38.2% expansion) to 0.6710 (61.8% expansion) region may push NZD/USD back towards 0.6570 (61.8% expansion), with a break of the January low (0.6529) opening up the 0.6470 (50% retracement) to 0.6480 (78.6% expansion) region.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong