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The New Zealand dollar has started the month of August under pressure against the US dollar on the foreign exchange market as the risk-sensitive pair retreats under the 0.7000 level due to falling Chinese stock markets and rising COVID-19 cases globally.
Historically the New Zealand Dollar has been considered a ‘high beta’ currency in that it is positively correlated to global investor sentiment, dropping when major stock markets fall and rising when stocks advance.
Despite the recent pullback a clear case be made for a lower before higher scenario for the NZDUSD pair, meaning that a downside correction may need to take place before a wider recovery starts due to the RBNZ potentially tapering QE in November.
Four major banks in New Zealand are predicting that the Reserve Bank of New Zealand will taper QE in November, as strong business growth and low infection rates in New Zealand boost domestic growth.
Traders should be aware that August is typically not a strong month for the New Zealand dollar from a seasonal perspective. The Kiwi traditionally tends to lose value against major peers during the month of August.
Citibank have also noted “NZDUSD tends to fall in the G10 currency space in August with more risk avoidance than in other months. This August seasonality is a type of anomaly, and we see no clear reason.”
Please be aware that due to its high correlation with commodities and risk unless we see US and global equities perform more strongly this month then a repeat of the New Zealand Dollar’s traditional August decline.
On the sentiment front traders have an increasingly neutral view towards the New Zealand dollar right now. According to the ActivTrader market sentiment tool some 46 percent of traders are bearish towards the NZDUSD pair.
This should be considered a sign of uncertainty and also the fact that range bound trading conditions are likely to persists. Watch out for any extreme sentiment reading to emerge as a counter signal.
NZDUSD Short-Term Technical Analysis
The four-hour time frame shows that the NZDUSD pair is trapped inside a large broadening wedge pattern and recently moved towards the middle of the mentioned pattern.
According to the overall size of the pattern, a price range of 0.6900 to 0.7100 could be about to play out over the coming week. Bulls ideally need to move the price above the 0.7100 level to get the bull party started.
A sustained break under the mentioned wedge pattern should be considered extremely bearish for the NZDUSD pair and could cause a steeper decline towards the 0.6600 area.
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NZDUSD Medium-Term Technical Analysis
Looking at the daily time chart the NZDUSD pair is making higher highs and lower lows, with bulls needing to defend the 0.6900 level this week to keep this dynamic in place.
Bulls have moved the price back above the 0.7050 level in order to encourage a test of the 0.7120 level. Once above this level then a rally towards the 0.7300 level should be expected.
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