NZD/USD continues to range close to 0.6950 as RBNZ meeting looms

• NZD/USD continues to trade around the 0.6950 mark having recovered from earlier lows under 0.6920.
• Though the pair is down more than 3.0% on the month, technicals do not suggest the kiwi is reaching oversold levels just yet.

NZD/USD has seen fairly choppy trading conditions on Tuesday, with the pair down as much as 0.5% when it hit session lows under 0.6920, before rebounding back to the 0.6950 mark since the arrival of US market participants. At current levels around 0.6950, the kiwi is trading flat on the day versus the US dollar. Trading conditions have died down in recent hours as NZD traders refrain from placing any further big bets ahead of Wednesday’s RBNZ monetary policy decision.

Technicals not coming to kiwi’s aid just yet

Since the start of the month, NZD/USD has dropped 3.0%. Failing a much larger hike than expected from the RBNZ at Wednesday’s meeting (of 50bps rather than 25bps) coupled with hawkish guidance on future rate hikes, the prospect for the pair recouping these losses is slim. Indeed, if the bank does opt to go with a 25bps rate hike and fail to impress markets with their guidance, a move back to session lows in the 0.6920 region and perhaps of the big figure just below it.

Technicals are unlikely to come to the kiwi’s aid just yet. NZD/USD’s 14-day Relative Strength Index score is at roughly 37.7, still above oversold territory (defined as 30 or lower). Meanwhile, NZD/USD’s Z-score to its 200-day moving average (i.e. the number of standard deviations away from the moving average) clocks in at -1.24. While this is in the bottom quartile of rolling Z-scores to the 200DMA recorded over the last five-year period, it doesn’t yet signal oversold conditions.

Typically, a Z-score to the 200DMA of under -2.00 is a better buy signal – this has been the case already on two occasions in 2021 (in mid-August and late-September). For NZD/USD’s Z-score to hit -2.00, the pair would need to fall back to roughly in line with the late-September low a few pips above 0.6950.

Westpac remains bullish on the pair in the medium-term, given that “global risk sentiment remains elevated, and NZ-US yield spreads remain attractive, while NZ commodity prices are rising”. The bank continues “to watch for this decline to run its course, and target a return to the Feb high of 0.7465+ by Q1 next year”.