NZD/JPY Range Looks to New Zealand Fundamentals

NZD/JPY Range Looks to New Zealand Fundamentals

The NZD/JPY surged on the day as the prospect of U.S. stimulus and signs that growth in China is sustaining helped fuel risk appetite. The pair has settled into a short-term range following the BoJ intervention spike as a declining yield outlook has weighed on the Kiwi against most currencies outside the dollar. Meanwhile, additional Japanese QE and the possibility of a second round of intervention is helping limit yen support. However, prevailing optimism is standing on shaky fundamentals and a disappointing earnings season could derail current momentum, favoring the low yielder.

Levels to Watch:

-Range Top: 62.75 (Range, Fibo, Pivot)

-Range Bottom: 60.75 (Range, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Short: Place an entry at 62.75
• Stop: Set the stop to 63.25-50 pips in risk
• Target: The first target is 61.22-10/12 low

Trading Tip – Markets are currently trending which has made our task of picking a target pair more difficult. It also raises the risks for our set-up as the NZD/JPY could join the party with a breakout. Additionally, we typically shy away from such a tight formation as it limit’s the room for error. Nevertheless, a strong fundamental case can be made for current bullish momentum to wane. However, we typically like to trade with the broader trend which in this case favors a break out to the upside. The lack of a catalyst until we get into the heart of earnings season next week gives us confidence that our short-term trade can yield the desired profits.

Event Risk for New Zealand and Japan

New Zealand – Weaker than expected retail sales would add to the growing sign that domestic growth in the commodity driven economy is beginning to falter. Demand from abroad has already started to slow growth which could be reflected in the September PMI reading. A deteriorating fundamental picture would enhance our bearish case. Upside surprises in demand and production could fuel existing bullish sentiment leaving us on the sidelines. However the biggest event risk could come from the quarterly inflation report as strong price growth would raise the outlook for interest rates, with declining inflation proving policy makers the ability to remain on hold.

Japan – The Japanese economic docket is full of significant gauges of the economy but none will posses market moving potential. BoJ Governor Shirakawa speaking on the financial system should draw focus, as hints of further intervention could weigh on the Asian currency.