Potential NZD trades

The NZD has been savaged of late, with traders selling out of bloc currencies to buy into the USD and GBP. One other currency that has seen powerful inflows of late has been the CAD, especially after the recent strong inflation data.

Source: Bloomberg

Yesterday’s confirmation that the RBNZ had sold NZ$521 million directly in the market saw further selling materialise in the NZD. Much has been made of the fact the nominal amount of kiwi dollars sold was the largest since 2007, but I think it’s also worth putting this into context given the quantity of firepower they used directly in the market.

In 2007 (when the central bank last intervened heavily), the RBNZ used 20% of their intervention capacity, whereas NZ$521 million is around 5.5% of its current capacity of reserves.  One could make a bullish and bearish case for the NZD here, but the fact is the central bank has used the downwards momentum in the market to push the unit even lower.

One trade that has worked well of late has been short NZD/CAD. However, given the fact the pair is oversold and testing the mutli-year uptrend I would be looking more closely at NZD/JPY shorts. Like NZD/CAD the pair is oversold and thus I would look more closely at selling into ¥85.43 (the 23.6% retracement of the recent sell-off from ¥88.94).

It seems important that NZD/JPY has closed through the recent double bottom. Plus we need to respect the fact the pair has seen such an aggressive decline, shaping directional bias. If filled, I would look at placing potential stops above the 38.2% retracement of the above-mentioned move at ¥86.10.

It’s tough to be long JPY, but in a world where central banks are increasingly trying to weaken their currency price, it’s possible that short positions could be potentially profitable.

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