New Zealand Dollar Outlook:
- Rates markets are pricing in an extremely aggressive RBNZ hiking cycle – so much so that it may be detrimental to the Kiwi.
- Technical indicators are pointing lower for both NZD/JPY and NZD/USD rates, which have recently touched fresh monthly lows.
- According to the IG Client Sentiment Index, the New Zealand Dollar has a bearish bias in the near-term.
Far Too Aggressive
The New Zealand Dollar may have experienced too much of a good thing. Whereas rising rate hike odds for the Reserve Bank of New Zealand were, at one point, a tailwind for the New Zealand Dollar, they may now have become a burden. Rates markets pricing in a 25-bps rate hike at every single RBNZ meeting through the end of 2022, in what would be the most aggressive rate hike cycle by a major central bank in the post-Global Financial Crisis era.
Over the coming months, the RBNZ is almost certain to disappoint market expectations as they’ve recently evolved. This, in turn, sets up a scenario where the New Zealand Dollar has been deprived of any further rate hike speculation that could fuel rallies, an asymmetric scenario that gives ample room for more downside in NZD-crosses moving forward.
NZD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (November 2020 to November 2021) (CHART 1)
NZD/JPY rates ultimately fulfilled their bullish potential that we had anticipated when we last reviewed the pair in September. But rate hike expectations have proven too firm, leading to the scenario that NZD/JPY rates, as a risk proxy, are particularly exposed to any downside price action in commodities or equity markets.
With today’s bearish piercing candle on the daily timeframe, NZD/JPY rates are seeing bearish momentum deepen. The pair is fully below its daily 5-, 8-, 13-, and 21-EMA envelope, which is now fully in bearish sequential order. Daily MACD’s descent continues, nearing a cross below its signal line, while daily Slow Stochastics are holding in oversold territory. Now that NZD/JPY rates are below the May high at 80.18, the next leg lower towards the July and September swing highs near 78.77 may have just begun.
NZD/USD RATE TECHNICAL ANALYSIS: DAILY CHART (November 2020 to November 2021) (CHART 2)
NZD/USD rates are exhibiting concerning price action that suggests a deeper pullback is underway. While the pair remains in a rising channel over the past five months, NZD/USD rates recently fell back below the descending trendline from the February, May, and September swing highs – a warning that the bullish breakout from October has now failed.
Bearish momentum is accelerating. NZD/USD rates are below their daily EMA envelope, which is fully in bearish sequential order. Daily MACD is starting to drop through its signal line, while daily Slow Stochastics are still holding in oversold territory. A move below the 23.6% Fibonacci retracement of the 2020 low/2021 high range at 0.6993 would foreshadow a pullback towards channel support at 0.6930 in the near-term, and if that is lost, then further losses towards the September swing low at 0.6860 should be anticipated soon after.
IG Client Sentiment Index: NZD/USD RATE Forecast (November 17, 2021) (Chart 3)
NZD/USD: Retail trader data shows 50.30% of traders are net-long with the ratio of traders long to short at 1.01 to 1. The number of traders net-long is 13.75% higher than yesterday and 45.81% higher from last week, while the number of traders net-short is 4.39% lower than yesterday and 5.22% 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