Divergent outlooks for Australia and New Zealand may mean a mid-term top for AUDNZD, while massive liquidation of yen short positions could halt the upside momentum in USDJPY.

Monday’s best-performing currency was the New Zealand dollar (NZD), which may be surprising to some because New Zealand's trade deficit ballooned in the month of July. Economists had been looking for the country's trade surplus to turn into a small deficit, but due to weak exports and a rise in imports, New Zealand reported its largest trade deficit since September 2012.

While the NZD initially fell on the report, the currency recovered very quickly because the increase in imports reflects stronger domestic demand. Compared to Australia, the outlook for New Zealand's economy is still brighter, with some economists even calling for New Zealand to be the best-performing G10 nation next year.

While we feel that this call may be a bit bold, we agree that the NZD is poised for further gains, especially against the Australian dollar (AUD). After hitting a four-month low at the end of last month, AUDNZD has staged a decent recovery up to 1.16. The pair is struggling to rally beyond this former support-turned-resistance level, however, and we feel that this could mark a medium-term top for the pair.

No economic reports are expected from any of the three commodity-producing nations over the next 24 hours, so traders should keep their eyes on the US dollar and especially gold, which exceeded $1400 an ounce for the first time in two months. If this level holds, we could see a further move towards $1500, which could rally AUDUSD.

A Possible Top for USD/JPY

The Japanese yen (JPY) traded lower against all major currencies on Monday with exception of the New Zealand dollar. Like the Eurozone, this is a busy week for Japan, but unlike the euro, Japanese data tends to have less impact on the currency.

Investors continue to look for reasons why USDJPY refuses to rise. Last Friday's CFTC IMM data showed speculators reducing their short yen/long dollar positions, and some are saying that the sale of USDJPY could be capping the move in the pair.

The Bank of Japan (BoJ) also released a report on inter-office assets in foreign banks, and according to JPMorgan, global investors unwound several billion worth of JPY shorts in June. The fear is that if emerging markets destabilize further, we could see more investors cut their yen shorts.

This is certainly a USDJPY risk that is worth monitoring, but we still believe that real money flows could find 3% yield too attractive to ignore. Small business confidence is the only Japanese data scheduled for release this evening.

By Kathy Lien of BK Asset Management