NZD/USD Rate Defends August Rally Ahead of US NFP Report

New Zealand Dollar Talking Points

NZD/USD defends the rally following the better-than-expected New Zealand Employment report even as Federal Reserve officials show a greater willingness to switch gears, and recent developments in the Relative Strength Index (RSI) indicate a larger recovery in the exchange rate as the oscillator breaks out of the downward trend from earlier this year.

NZD/USD Rate Defends August Rally Ahead of US NFP Report

NZD/USD trades above the 50-Day SMA (0.7047) for the first time since June after slipping to a fresh yearly low (0.6881) in July, and the update to the US Non-Farm Payrolls (NFP) report is likely to influence the exchange rate as Fed Vice-Chair Richard Clarida fuels speculation for a looming exit strategy.

The NFP report is now expected to show the US adding 870K jobs in July following the 850K expansion the month prior, and signs of stronger labor market may undermine the recent rebound in NZD/USD as it puts pressure on the Federal Open Market Committee (FOMC) to scale back its quantitative easing (QE) program.

At the same time, a dismal development may spark a bearish reaction in the US Dollar as it provides the Fed with scope to retain the current course for monetary policy, but a further recovery in NZD/USD may fuel the recent shift in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 39.16% of traders are currently net-long NZD/USD, with the ratio of traders short to long standing at 1.55 to 1.

The number of traders net-long is 0.69% lower than yesterday and 19.27% lower from last week, while the number of traders net-short is 3.22% higher than yesterday and 24.03% higher from last week. The decline in net-long position could be a function of profit-taking behavior as NZD/USD defends the advance from earlier this week, while the rise in net-short position has fueled the shift in retail sentiment as 51.48% of traders were net-long the pair last week.

With that said, it remains to be seen if the NFP report will undermine the recent rebound in NZD/USD as the update is anticipated to show a further improvement in employment, but a further recovery in the exchange rate may fuel the recent shift in retail sentiment like the behavior seen earlier this year.

NZD/USD Rate Daily Chart

Source: Trading View

• Keep in mind, a head-and-shoulders formation materialized in the first quarter of 2021 as NZD/USD pushed below the 50-Day SMA (0.7047) for the first time since November, and the decline from the yearly high (0.7465) may turn out to be a change in the broader trend as the exchange rate trades below the 200-Day SMA (0.7095) for the first time since June 2020.
• NZD/USD slipped to a fresh yearly low (0.6881) in July as the Relative Strength Index (RSI)tracked the downward trend established in April, but recent developments in oscillator indicate a larger recovery in the exchange rate as it breaks out of the bearish formation.
• In turn, NZD/USD trades back above the 50-Day SMA (0.7047) for the first time since June, but need a break/close above the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion), which lines up with the 200-Day SMA (0.7095) to bring the 0.7260 (78.6% expansion) region on the radar.
• However, lack of momentum to break/close above the Fibonacci overlap around 0.7070 (61.8% expansion) to 0.7110 (38.2% expansion) may keep NZD/USD within a defined range, with a move below the 0.6940 (50% expansion) to 0.6960 (38.2% retracement) opening up the 0.6870 (50% retracement) region.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong