NZD/USD Rate Approaches 2020 High as Net Short Exposure Persists

New Zealand Dollar Talking Points

NZD/USD trades to a fresh monthly high (0.6689) as the US Dollar continues to weaken against all of its major counterparts, and current market conditions may produce an extreme reading in the Relative Strength Index (RSI) as the indicator now flirts with overbought territory.

NZD/USD Rate Approaches 2020 High as Net Short Exposure Persists

NZD/USD appears to be on track to test the 2020 high (0.6733) as the New Zealand Dollar outperforms most of its major counterparts in July, and the crowding behavior in the US Dollar may keep the exchange rate afloat as the IG Client Sentiment report shows retail traders are still net-long USD/CHF, USD/JPY and USD/CAD, while the crowd remains net-short GBP/USD, NZD/USD, AUD/USD and EUR/USD.

Retail traders have been net-short NZD/USD since May, with the latest update showing 46.33% of traders net-long,while the ratio of traders short to long stands at 1.16 to 1. The number of traders net-long is 9.19% higher than yesterday and 27.47% higher from last week, but the number of traders net-short is 2.82% lower than yesterday and 32.55% lower from last week.

It seems as though the ongoing appreciation in NZD/USD is triggering an increase in net-long interest as the exchange approaches the 2020 high (0.6733), while the ongoing contraction in net-short interest suggests stop orders are getting triggered as the New Zealand Dollar continues to outperform its US counterpart.

Looking ahead, it remains to be seen if the crowding behavior will persist ahead of the Federal Reserve interest rate decision on July 29 as open interest for NZD/USD narrows 13.73% from the previous week, but current market conditions may keep the exchange rate afloat as the central bank pledges to β€œincrease its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace.”

With that said, NZD/USD appears to be on track to test the 2020 high (0.6733) as it extends the advance from the start of July, and a further appreciation in the exchange rate may produce an extreme reading in the Relative Strength Index (RSI) as the indicator now flirts with overbought territory.

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NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, NZD/USD cleared the February high (0.6503) in June as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, and the exchange rate may continue to retrace the decline from earlier this year as it takes out the June high (0.6585) during the first full week of July.
  • NZD/USD now appears to be on track to test the 2020 high (0.6733) as it trades to a fresh monthly high (0.6689), and a further appreciation in the exchange rate may produce an extreme reading in the RSI as the indicator now flirts with overbought territory.
  • A break above 70 in the RSI is likely to be accompanied by a further appreciation in NZD/USD like the behavior seen in June, but lack of momentum to push into overbought territory would indicate a divergence with price as the oscillator fails to preserve the upward trend from March.
  • Need a close above the 0.6670 (23.6% expansion) region to open up the Fibonacci overlap around 0.6710 (61.8% expansion) to 0.6740 (23.6% expansion), which lines up with the January high (0.6733), with the next area of interest coming in around 0.6790 (50% expansion).

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— Written by David Song, Currency Strategist

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