Hedge Covers Long-Term Sellers NZDJPY Looks To Correct Higher

Since the end of February the Kiwi has fallen nearly 1000 pips against the Yen as US guided risk aversion led to the unwinding of the carry trade. But just as the markets look to be finding solid footing, an unsuspecting new villain may further continue driving the Kiwi lower - Reserve Bank of New Zealand Chairman Alan Bollard. With his explicit call for further rate cuts by year's end, Bollard has dashed hopes of a Kiwi comeback. In fact, some estimates go so far as to call for an additional 200 basis point drop in the benchmark lending rate in the remaining six months of the year.

While a contracting yield gap gives NZDJPY a definitively bearish bias in the long term, the technical outlook opens the door for a corrective up move. NZDJPY price action had been oscillating in a Pennant formation before breaking downward to find support at 79.02, the 23.6% Fibonacci retracement of the 02/26 - 03/18 sell-off. With the stochastic oscillator flattening near oversold territory, we see the pair is losing short-term selling pressure and likely to headed for a pull-up to test the 38.2% Fib at 80.74.

Hedging Strategy

Currency Pair: NZDJPY

Long Term Bias: Bearish
Long Term Position: Holding Short

Short Term Bias: Bullish
Short Term Position: Buy above 79.02, Target 80.74, Stop-Loss at 77.84

Traders looking to protect their existing short NZDJPY position or enter short at a favorable price may consider a hedge long NZDJPY above 79.02 with a target at 166.84. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should EURJPY break out to the upside prior to the limit being hit. We will set the stop-loss near 171.20.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods - sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.

DailyFX

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