Inverse Head-and-Shoulders on NZD/JPY?

Forex Trade Idea: NZD/JPY

NZD/JPY is presenting an interesting forex trading opportunity to play my bearish bias on the Japanese yen. Is that a classic bullish pattern forming on the 4 hour charts?

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

NZD/JPY 4 Hour Forex Chart

NZD/JPY 4 Hour Forex Chart

It’s been a wild week for the markets due to tensions between Ukraine and Russia. That seems to have subsided, which means I can get back to taking risk! And for this week, I decided to blend the biases from my last two trade ideas: long USD/JPY and long NZD/CAD.

While I still like long-term bull plays on both of those pairs, I think playing NZD/JPY is a much better alternative to play the theme of monetary policy divergence, as well as catch some positive interest rate differential as well. For those not caught up with the central banks of both New Zealand and Japan, New Zealand is expected to tighten up interest rates next week (from 2.50% to 2.75%), while Japan is continuing its low rate (0.10%) and expanding its base money by 60 – 70 trillion yen this year.

Personally, I think almost anything can happen after the RBNZ monetary policy statement next week (e.g., no hike, no reaction from traders, “buy rumor, sell news”, unexpected press conference rhetoric,  etc.), so I’m not gonna even try to guess what will happen then. But I do think that the Bank of Japan will continue its easy monetary policy well into the year as they would like to see if the upcoming sales tax increase in April will hurt their economy.  Overall, unless the RBNZ surprises with a rate cut or very dovish rhetoric on future economic outlook, NZD will still be attractive against the yen–I’ll just have to weather some volatility in the short term.

Technically, I pulled out the 4 hour chart on NZD/JPY and highlighted a possible inverse head-and-shoulders formation.  My best guess is that 85.50 is the shoulder line to watch as it seems to be the “line in the sand” between bulls and bears over the past few months. The market is holding above that level at the moment, signaling bulls are in control for now.  Since the RBNZ is meeting next week, I’m going to be conservative with my entry by waiting for a retest of the shoulder line. My stop will be below the last couple of swing lows, and my target will be 2013 high’s and beyond.  Here’s what I am doing:

Long half position at 85.50, stop at 83.75, max profit target at 100.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of over 8:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!