Since RBNZ surprised markets with a 50 bps cut this month, NZD/JPY has coiled below key resistance as it builds up energy for its next directional move. How prices react around resistance could be the key for way it breaks next.
Whilst we see the area around 69.30 as pivotal, we are open to a directional move either side of it. And there are a few scenarios to consider.
- Ongoing trade wars are likely to remain a headwind for commodity currencies such as NZD, CAD and AUD, so for now any upside is likely to be corrective in our view.
- However, if markets are to revert to risk-on, NZD/JPY could be a prime candidate for a rebound.
- Further, markets aren’t expecting another rate from RBNZ any time soon, as we have to look ahead one full year before OIS markets fully price in another 25-bps cut. Still, if data picks up, it could provide a tailwind and add to the argument for a bounce, even if it’s not strong enough to justify a trend reversal.
Technically, the structure is firmly bearish and we like how momentum intensified on its latest leg lower. With prices now coiling around the 68c level the case for range expansion is building, although it could be argued that we’re in need of mean reversion before its next leg lower.
Key resistance around 69.30 comprises of the Flash-crash low, 2016 lows and weekly R1 (projected form its weekly pivot).
- If prices are to drift towards this key level, bears could fade into the move and consider a stop somewhere above the zone. This allows them to either short within its current range, or position themselves for an anticipated break to new lows.
- However, if range expansion breaks above key resistance, we can assume something bigger is going down and that a deeper retracement is on the cards. Under this scenario, we could use 70c as an initial target, which is near the June low and 50% retracement level. As this is counter-trend, we’d prefer to keep targets conservative.
- Alternatively, if bearish momentum returns and breaks to new lows, we’d keep an open target. However, we’d prefer to run a tighter stop given the lack of mean reversion under this scenario.
Either way, how prices react below key resistance remains key for its next directional break.