New Zealand Dollar Outlook:
- New Zealand economic data momentum has been steadily improving over the past few months.
- NZD/JPY rates continue to consolidate in a multi-month range as well as an ascending triangle after an uptrend, while NZD/USD rates may be forming a morning star candlestick pattern in recent days.
- Nevertheless, according to the IG Client Sentiment Index, the New Zealand Dollar has a bearish bias in the near-term.
Fundamentals Have Improved
The Kiwi has had a difficult turn through the middle of the year, failing to capitalize on an environment that showcases one of the more aggressive major central banks thanks to steadily eroding New Zealand terms of trade.
But things may be starting to look up: the New Zealand Citi Economic Surprise Index, a gauge of economic data momentum, has steadily churned higher in recent months, from -59.7 two months ago to -18.5 today.
Now, as many other developed economies contend with recession fears, potentially hamstringing their central banks from proceeding with further rate hikes, the Reserve Bank of New Zealand is expected to hike rates by another 100-bps through the end of the year.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
NZD/JPY rates are still within the range that’s formed since early-June, and the congestion is contained within a symmetrical triangle that’s been forming since early-April. Contextually, both patterns have transpired following the sharp uptrend at the start of the year. The directional bias would be for a move to the upside, given the preceding move.
At present time, however, momentum is neutral. NZD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is holding flat at its signal line, while daily Slow Stochastics are descending towards their median line. It remains the case that “a move above 86.81 would end the series of lower highs and lower lows since early-June, increasing the likelihood of a return to the yearly high at 87.35.”
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 2)
NZD/USD rates have experienced sharp downside over the past two weeks thanks to the resurgent US Dollar. While an inverse head and shoulders pattern may be forming dating back to April, it’s too soon to call a longer-term bottom until the neckline breaks. However, a short-term bottom may have been carved out in recent days, as price action since Friday has taken the form of a morning star candlestick pattern. A move above the confluence of Fibonacci retracements (61.8% of 2020 low/2021 high at 0.6231 and 23.6% of 2014 high/2020 low at 0.6264) coupled with a return above the daily 21-EMA (one-month moving average) would give credence to a short-term bottom having developed.
IG Client Sentiment Index: NZD/USD RATE Forecast (August 23, 2022) (Chart 3)
NZD/USD: Retail trader data shows 66.44% of traders are net-long with the ratio of traders long to short at 1.98 to 1. The number of traders net-long is unchanged than yesterday and 17.67% higher from last week, while the number of traders net-short is 2.63% lower than yesterday and 20.86% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist