Potential trade idea: sell NZD/JPY

This week's potential trade idea: sell NZD/JPY at 86.50 (level at the time of writing), with a stop at 87.60, and a potential target of 85.00.

In theory I should be looking at EUR/USD trades this week given the ECB meeting is shaping up to be the key central bank meet of the year. If anything I would be selling strength in the pair and my ‘ one to watch’ idea from May 14, with limits at 1.3715, still stands. However, given the lack of clarity as to what is likely to transcend, plus given current market positioning, I am looking at trades which aren’t affected so much by actions from the ECB.

Technically NZD/JPY is heading lower, with the short-term moving averages clearly highlighting the trend. The MACD is below zero, while stochastics are also highlighting the weakness in the trend.

I am looking to place a stop loss just above the May 27 high and 38.2% retracement of the April to April fall at 87.41, while targeting a move towards the 85 handle over the medium term.

Fundamentally it is clear the BoJ seems content with how the Japanese economy is shaping up, and on Friday a number of investment banks changed their calls on when they expect further easing from the BoJ. Most either sit in the camp that the bank will ease further in October, while others feel it won’t materialise at all. Given the current optimistic language I feel the likelihood is that we get no new action from the BoJ this year, which in theory should cap weakness in the JPY.

On the NZD side there has been a sizeable 23% fall in spot prices on the Global Dairy Trade (GDT) platform since February, which is the portal for which all New Zealand’s dairy exports are exchanged. Fonterra recently lowered its forecast payout to local producers. This should weigh on growth and lower the need for rate hikes.

There is a strong chance that we get a further 25 basis point hike from the RBNZ on June 12, however the RBNZ could signal that there could be pause in its current cycle. Given the market is pricing in three more hikes over the coming 12 months, this could weight on the Kiwi.

On the billing this week we get terms of trade data and QV house prices in New Zealand.

We could also get some weakness in the pair if the ECB doesn’t meet the markets’ demands.

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