Forex Trade Idea: 2014-04-16
As I let my long USD/JPY forex trade marinate, the pullback in NZD/JPY looks like another opportunity for me to play my bullish NZD bias.
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.
After my long NZD/CAD trade, I mentioned that I was still long-term bullish on Kiwi, mostly on the outlook of rising rates from the RBNZ. It has been on a massive run since last year, and since we got the rate hike from the RBNZ that the market was expecting in March, it’s natural to see a pullback on profit taking. Also, the Yen saw strength recently as the BOJ decided to hold off on any new easing initiatives to help Japan’s recovery. Long-term, I still feel the Kiwi is more attractive than the Japanese Yen as the economic conditions in Japan may be hit with the new sales tax, potentially sparking more easing from the BOJ down the road.
Since nearly hitting 90.00 at the start of April, NZD/JPY has pulled back a little over 2.00% to retest an area of previous resistance and the 61% Fibonacci retracement of the most recent swing higher. And despite the lower-than-expected New Zealand quarterly CPI read earlier today (0.3% vs. 0.5% forecast), this area is still holding as support at the moment. That’s not a big pullback in the big picture, but it may be enough for shorter-term players to take a swing for a decent reward-to-risk setup here.
And that’s what I’m doing; I don’t think we’ll see the start of another 1000 pip move for this pair, but the previous swing high is not an unreasonable short-term target IF the bulls take control again. I’m going long the pair here at these levels with a small position; my stop is below the previous swing low and my soft target is the previous swing high. Here’s what I am doing:
Long half position NZD/JPY at 87.80, stop at 86.20, initial target of 90.00
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 about 1.37:1. If I do see 90.00 retest, I’ll reassess there and adjust, and if conditions are looking bullish, I’ll look to scale in and trail my stop to maximize my potential reward. If conditions aren’t that bullish, I’ll look to decrease my risk and/or lock in profits.
The biggest risks to this trade are a step back in hawkish rhetoric from the RBNZ at next week’s monetary policy meeting and/or a sudden rise in risk-off sentiment (most likely due to the geopolitical issues in Ukraine). 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!