Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

DailyFX Top Trade this Week – NZDJPY As Risk Trends Heave

There has been a serious bout of volatility for the global financial markets this past week, and everything looks primed for big moves. However, it is important to select the right setups for the specific view you intend to trade.

NZDJPY, Volatility and Event Risk Talking Points

  • Risk aversion was pronounced this past week with US indices in particularly garnering enormous attention
  • There are many assets that will respond to ebb and flow in risk trends, but conflicting data releases can create problems on a clear trading ‘bead’
  • In FX, the Yen crosses are good measures of sentiment, but NZDJPY looks appealing in particular for its technical and fundamental staging this week

It was hard to see the serious jolt of risk aversion that rippled through the markets this past week. Volatility and some technical progress from the likes of the S&P 500 though are not a guarantee that the post-pandemic bull trend has been totally flipped. That call should come with further key technical events and keeping track of the sentiment taken by market participants through fundamental developments and sentiment in the public forum. Depending on your own risk tolerance, you may have called the turn or await further confirmation before settling into views for a declines that last multiple weeks. If you are on the fence – I’m not fully convinced myself – then it is worth looking for pairs that have the technical context to offer a point of recovery or break. NZDJPY is a good candidate for gauging ‘risk on / risk off’ for a few reasons.

Chart of NZDJPY with Head and Shoulders Pattern (Weekly)

First and foremost, the chart shows the pressure building in the long-term congestion that has followed the post-pandemic rally (above). Though exaggerated, the NZDJPY cross has established a head-and-shoulders pattern following a two year run that has stretched approximately 2,250 pips from trough to peak. I always look for significant build up to precede such congestion patterns as there needs to be something to ‘reverse’. Fundamentally, this is a pair that is very sensitive to the outlook for risk trends as well as the speculation swirling around interest rate speculation. You can look at relative yields between the Kiwi and Yen, but I think more important is the forecast anticipation aspect which sees RBNZ pushing potentially 4 rate hikes this year while the BOJ stays anchored near zero. Should risk aversion deepen, rate speculation will soften – creating an dual weigh on NZDJPY.

Perception of Monetary Policy Standing of Major Central Banks

So, why is NZDJPY better than some of the other Yen crosses that have equally appealing technical bona fidas (USDJPY, CADJPY, etc)? There is additional fundamental opportunity to be found with many of these alternative crosses – many which are more liquid which is a dampener itself. With the FOMC and Bank of Canada rate decisions ahead – among a lot of other high-profile fundamental sparks – a clean risk view can be significantly distracted by cross winds that briefly charge moves not based on sentiment or stalls momentum that frequently occurs before the release of major event risk. New Zealand has 4Q CPI on tap this week, but it will be heavily over-powered by risk trends. Keep tabs on 76.00 That could be either a big break point or support for a move back into range depending on how sentiment plays out ahead.

Chart of NZDJPY with Head and Shoulders Pattern (Daily)

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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