Strategy for AUD/JPY, NZD/JPY with Volatility Due Next 24-hours
- The Japanese Yen's resiliency continues, and it now appears that several significant JPY-crosses could breakdown in the coming days.
- The retail crowd remains net-short the Japanese Yen, which is a contrarian indicator pointing to further gains.
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In an admittedly quiet week for FX markets thanks to a near-barren economic calendar, volatility has been muted and price ranges have been tight. While the US economic calendar itself won't provide anything meaningful until Friday's July US Consumer Price Index release, upcoming data out of the Asia-Pacific region should bring movement to the Australian and New Zealand Dollars, as well as the Japanese Yen.
Over the next 24-48-hours, Chinese inflation data and the Reserve Bank of New Zealand rate decision should bring about a welcomed burst of volatility in AUD/JPY, AUD/USD, NZD/JPY, and NZD/JPY, among others. Slowly improving inflation readings out of China could filter through and impact the Australian and New Zealand Dollars under the guise that greater demand and ‘hotter’ economic activity from China will help with the two antipodean currencies appreciate.
Yet even if Chinese data comes out strong, the New Zealand Dollar still has to contend with what should be a more dovish RBNZ. Since the June 22 policy meeting, the Q2’17 New Zealand Consumer Price Index slipped back to +1.7% from +2.2% (y/y), while NZD/USD has rallied over +1.4%. Further New Zealand Dollar strength over the interim makes it more difficult for the RBNZ to achieve its inflation goal, which they could very well point out this week. These appear to be factors that would suggest a relatively more dovish tone should be in place when the RBNZ meets on Wednesday.
Given these upcoming catalysts, and the fact that the Japanese Yen has remained quite resilient the past few days despite the bump in US Treasury yields after the July US Nonfarm Payrolls report, it would seem that both AUD/JPY and NZD/JPY are in vulnerable positions over the coming days. Both pairs have seen momentum indicators turnover from bullish towards bearish, and both pairs have seen their uptrends from the June swing lows broken in recent days. A soft Chinese inflation print and a dovish RBNZ could easily send AUD/JPY and NZD/JPY, respectively, on their way to new lows in the coming days.
--- Written by Christopher Vecchio, Senior Currency Strategist
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