New Zealand Dollar Outlook:
- It feels like déjà vu for the Kiwi: the last time the Reserve Bank of New Zealand raised interest rates by 50-bps, the New Zealand Dollar rallied ahead of the announcement but sold off quickly thereafter.
- Both NZD/JPY and NZD/USD rates are holding below resistance ahead of the May RBNZ rate decision.
- According to the IG Client Sentiment Index, the New Zealand Dollar has a bullish bias in the near-term.
Same Setup, Different Meeting
We’ve been here before, right? The New Zealand Dollar has rallied the past few days ahead of the May Reserve Bank of New Zealand rate decision, where it is widely anticipated the RBNZ’s main rate will rise by another 50-bps.
Does this sound familiar? At the April RBNZ meeting, policymakers raised rates by 50-bps despite consensus forecasts calling for a 25-bps rate hike. In a classic ‘buy the rumor, sell the news’ setup, the New Zealand Dollar fell by approximately -2% against its peers as the RBNZ’s forward guidance – expectations for forthcoming rate hikes during 2022 – disappointed expectations.
Therein lies the sense of déjà vu: the RBNZ could very well deliver a 50-bps rate hike at the May meeting, only to find the New Zealand Dollar trading lower because market participants walk away disappointed by the forward guidance outlined by policymakers. And with both NZD/JPY and NZD/USD rates holding below key resistance, this leaves the New Zealand Dollar vulnerable to start its next turn lower – unless, of course, the RBNZ unveils a significant hawkish surprise.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2022) (CHART 1)
NZD/JPY rates are holding below a trifecta of resistance: the October 2021 highs; the ascending trendline from the March 2020 and August 2021 lows; and the one-month moving average (daily 21-EMA). Failure here could see NZD/JPY rates trade sharply lower towards the month lows below 80.00, a move aided by the Japanese Yen’s recent strength in an otherwise risk-off environment. Only a move above 82.80 would warrant consideration for taking action from a bullish perspective.
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2022) (CHART 2)
NZD/USD rates have rebounded faster than their NZD/JPY counterpart, thanks to the pullback in USD/JPY rates. The pair is holding near two key levels: the 50% Fibonacci retracement of the 2020 low/2021 high range at 0.6467; and the one-month moving average (daily 21-EMA) at 0.6440.
In the event of a turn lower, a significant cluster of Fibonacci retracements may serve as an area to look for support: the 23.6% retracement of the 2014 high/2020 low range at 0.6364 and the 61.8% retracement of the 2020 low/2021 high range at 0.6231, respectively.
IG Client Sentiment Index: NZD/USD RATE Forecast (May 24, 2022) (Chart 3)
NZD/USD: Retail trader data shows 69.18% of traders are net-long with the ratio of traders long to short at 2.25 to 1. The number of traders net-long is 3.69% lower than yesterday and 7.62% higher from last week, while the number of traders net-short is 14.39% higher than yesterday and 10.22% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZD/USD prices may continue to fall.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse higher despite the fact traders remain net-long.
— Written by Christopher Vecchio, CFA, Senior Strategist