NZD/USD Rate Rally Emerges Ahead Of RBNZ Interest Rate Decision

NZD/USD continues to carve a series of higher highs and lows as it extends the rebound off of the 50-Day SMA (0.7178), and the exchange rate may trade to fresh 2021 highs over the remainder of the month as the RBNZ appears to be on track to retain the current course for monetary policy.

Image of DailyFX economic calendar for New Zealand

It seems as though the RBNZ will rely on its balance sheet to support the New Zealand economy after unveiling a Funding for Lending Programme (FLP) at its last meeting for 2020, and Governor Adrian Orr and Co. may endorse a wait-and-see approach for the foreseeable future as “the Committee agreed that it remained appropriate for fiscal policy to play the primary role in bolstering economic outcomes, given the nature of the economic shock.”

At the same time, the RBNZ appears to be in no rush to implement a negative interest rate policy (NIRP) as “members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the Committee’s principles for alternative monetary policy instruments.”

In turn, more of the same from Governor Orr and Co. may keep NZD/USD afloat as the Federal Reserve stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and key market trends may continue to influence the exchange rate as the US Dollar still broadly reflects an inverse relationship with investor confidence.

Image of IG Client Sentiment for NZD/USD rate

Meanwhile, the tilt in retail sentiment also looks poised to persist as traders have been net-short NZD/USD since October, with the IG Client Sentiment report showing 32.01% of traders currently net-long the pair as the ratio of traders short to long stands at 2.12 to 1.

The number of traders net-long is 25.56% higher than yesterday and 24.67% lower from last week, while the number of traders net-short is 0.21% lower than yesterday and 4.38% lower from last week. The narrowing in net-short position comes as NZD/USD clears the January high (0.7315), while the decline in net-long interest has spurred a further tilt in retail sentiment as 39.68% of traders were net-long the pair during the previous week.

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