NZD/USD : Breakout on Narrow Range

(Wed, 27 Jan 2021). NZD/USD breaks out of the range bound price action from earlier this week on the back of US Dollar weakness, and the Federal Reserve interest rate decision may do little to derail the bullish price action as the central bank relies on its non-standard tools to support the US economy.

NZD/USD BREAKS OUT OF NARROW RANGE AHEAD OF FOMC RATE DECISION

NZD/USD appears to have reversed course ahead of the 50-Day SMA (0.7096) as it extends the rebound from the monthly low (0.7096), and the pullback from the January high (0.7315) may turn out to be an exhaustion in the broader trend rather than a change in market behavior as the Fed’s balance sheet climbs to a fresh record high in 2021.

In turn, key market themes may continue to sway NZD/USD as long as the Federal Open Market Committee (FOMC) stays on track to “to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month,” and the exchange rate may exhibit a bullish behavior ahead of the Reserve Bank of New Zealand’s (RBNZ) first meeting for 2021 as the US Dollar still reflects an inverse relationship with investor confidence.

It remains to be seen if the RBNZ will continue to endorse a dovish forward guidance after unveiling the Funding for Lending Programme (FLP) at the November meeting as “the Committee agreed that it was prepared to lower the OCR (official cash rate) to provide additional stimulus if required.”

However, the update to New Zealand’s Consumer Price Index (CPI) may keep the RBNZ on the sidelines as “most Committee members agreed that risks to the baseline scenario were less skewed to the downside than they had appeared earlier in the year,” and Governor Adrian Orr and Co. may merely attempt to buy time on February 24 as the central bank carries out the FLP in tandem with the Large Scale Asset Purchase (LSAP) Programme.

Until then, swings in risk sentiment may continue to influence NZD/USD as key market themes remain in place, and it looks as though the tilt in retail sentiment will also persist as the crowding behavior from the first half of 2020 resurfaces.

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