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Kiwi Vulnerable As Policy Expectations Shift, EUR/JPY Conditions Ripen

Kiwi Vulnerable As Policy Expectations Shift, EUR/JPY Conditions Ripen

David de Ferranti, Currency Analyst

An upbeat BOJ and fading expectations for further stimulus, coupled with the potential for investor sentiment to sour, could see the Yen strengthen. Meanwhile, the ECB has taken another step towards the extreme dovish end of the monetary policy spectrum.

Pitting their respective currencies against one another may present an opportunity for EUR/JPY shorts, with chart conditions appearing ripe. With a descending trend channel intact, the push below 137.60 paves the way for a descent to the 2014 low at 136.30. Invalidation would occur on a daily close back above the 137.60 mark.

Fading expectations for further rate hikes from the RBNZ, alongside souring dairy prices may leave the Kiwi vulnerable to a correction. Yet the potential for carry demand to support the currency remains a risk to short NZD/USD positions, thus pitting it against its high-yielding sibling the AUD may be a safer alternative.

This puts a multi-decade range-bottom near 1.0500 for AUD/NZD in focus. The pair’s most recent bounce may open the 1.0900 handle, while a turn back below 1.0700 would place the immediate risk to the downside.

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