NZD/JPY has had a rough couple of months, shedding nearly -7% from its March high. Now within a consolidation phase, we’re on the lookout for a breakout, one way or another.

We can see on the daily chart the trend is clearly bearish with its strong momentum, lower lows and shallow pullbacks. Yet given the extended nature of the move, it’s plausible it could be due a correction. Prices are currently coiling having printed a series of small bullish hammers above so there is a hesitancy to move lower, at least over the near-term. Yet with the series of lows between August and October providing resistance, price action is essentially boxed in between 71.50-72.30.

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For now, we’re monitoring the consolidation phase, as a return of momentum could signal its next directional move.

  • If prices continue to consolidate below 72.50 and pullback towards the averages a little more, we’d be more comfortable with a short position.
  • However, if prices remain above 71.50 and break 72.50 with conviction, we could see NZD/JPY headed higher as it heads for the gap around 73.47/64

Drivers for upside potential:

  • RBNZ shifted to neutral at their last meeting, so improving economic data could provide a tailwind for a heavily sold currency.
  • If trade tensions are to thaw, demand the JPY would likely reverse course and send NZD/JPY and AUD/JPY markedly higher.
  • A combination of the two would make any upside the more aggressive.

Drivers for downside potential:

  • Trade tensions increase and/or we see a further downside pressure on global equities, which places the globe back into risk-off mode to send NZD/JPY and AUD/JPY lower.
  • Domestic data continues to weaken, particularly inputs for growth and inflation or employment.

That said, data specifically for New Zealand remains on the quiet side for the foreseeable future. So, without new developments for trade could continue to see NZD/JPY trade in a range for a whilst long. But if we do see momentum return which is backed up by a key driver, then we’d expect a solid break of compression.

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