The Force Needed to Develop a Major NZDJPY Trend Helps Range Traders

The Force Needed to Develop a Major NZDJPY Trend Helps Range Traders

ZDJPY is a risk-laden pair. With a distinct correlation to risk trends, a history of high volatility and wide reversals; there is a distinct danger when attempting to range trade the pair. However, these characteristics need to be set against a robust technical background and an active countdown to a drop in liquidity. The technical picture of this particular yen cross is what makes it preferable over its compatriots.




How stable is the NZDJPY Range?

• Levels to Watch:
-Range Top: 1.0200 (Trend, SMA, Pivot, Fibs)
-Range Bottom: 1.0030 (LT Range Bottom)
• Though there is some question as to the Japanese yen’s roll as a funding currency and the kiwi’s ability to compete as a high-yielding carry currency; the two are still firmly planted on opposite sides of the risk spectrum. In turn, underlying investor sentiment has been and will remain the primary driver for NZDJPY price action. Closing end on the weekend and looking ahead to thin liquidity next week, major breakouts will be difficult to generate.
• Over the past 24-hours, we have seen a dramatic increase in volatility and a short-term break out from congestion. However, the fireworks for the session wouldn’t alter the larger technical picture. This pair has maintained a dominant and precise, rising trend channel that was developed back in March. The floor to this pattern comes in around 64.50.

Suggested Strategy
• Long: An entry orders at 64.75 is very close to the dense collection of support.
• Stop: Tails and a prominent range low around 63 mean a stop of 63.95 carries some risk. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• Target: The first objective is one-and-a-half times (120) at 65.95. The second is 66.75.

Trading Tip – NZDJPY is a risk-laden pair. With a distinct correlation to risk trends, a history of high volatility and wide reversals; there is a distinct danger when attempting to range trade the pair. However, these characteristics need to be set against a robust technical background and an active countdown to a drop in liquidity. The technical picture of this particular yen cross is what makes it preferable over its compatriots. While other yen-based pairs have developed patterns with a rising floor (mostly ascending wedge patterns), a bullish trend channel has clearly defined the NZDJPY’s path for eight months now with precision. The floor to the rising congestion zone has proven itself market-worthy through successful test in April, May, July and October. What’s more, there is further support added to a floor in price action in the form of a 100-day SMA and a dense Fib congestion. As strong as the pair looks technically, it is the outlook for market activity that offers the real appeal. The weekend is quickly approaching and major trend reversals (which a true break of 65 would mark the first step towards) don’t typically occur just before all liquidity drains. What’s more, next week will be truncated for the US markets and the potential for shallow market depth ahead will discourage the development of major trends just before so many large sources of capital are to go offline. As for the suggested strategy itself, though there is promising outlook and strong technicals; a forgiving setup is important and a reasonable timeframe vital. Our entry is set very close to support to improve risk/reward; and the stop is meant to protect against a sizable tail. As for timing, we will cancel all open orders by mid-US session Friday.

Event Risk for New Zealand and Japan

New Zealand – This morning, the opposition New Zealand Labour Party withdrew its support of the Reserve Bank of New Zealand and its primary policy focus on controlling inflation. As the nation struggles with its recovery and trade suffers from unfavorable exchange rates; the political group has called on the central bank to target policies that promote a competitive currency and maintain low borrowing rates. Whether or not this move threatens the central bank’s independence remains to be seen; but it could dissuade investors that are more selective in their investments. As for fundamental risks going forward, risk appetite will maintain its dominance over the kiwi dollar; but there may be some interest in scheduled event risk – though there is little risk that it will define any trends.

Japan – The Japanese yen advanced Thursday as the broader financial markets delayed the overwhelming effort to develop a major trend (bullish or bearish) for another day. For the currency’s crosses; the advance was meaningful because it released the built up pressure in tight congestion patterns that had developed over the past week; but it was also ultimately restrained action as larger patterns have generally maintained the yen’s broad stability. Looking outside the influence of risk appetite, there is a round of notable event risk and a BoJ rate decision scheduled. The central bank announcement may be influential should speculation that the group will admit the country is suffering a period of deflation – an aspect that would certainly bolster its appeal as a funding currency.