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Forex Trade Idea: 2014-07-29

The Kiwi has been taking a hit on recent rate hold expectations from the RBNZ and weak economic data. Is this an opportunity for NZD/JPY bulls to hop back in?

NZD/JPY Daily Forex Chart
NZD/JPY Daily Forex Chart

Kiwi bulls have been feeling the pain of market reversing in favor of the bears ever since last week’s Reserve Bank of New Zealand’s (RBNZ) monetary policy meeting.  Yes, they did raise the Official Cash Rate by 25 basis points to 3.50%, but they also signaled that it was time to pause and see how the rate changes will affect the economy.  By itself, this action doesn’t make the Kiwi less attractive, but it’s enough for those aggressive forex traders with big long bets to lighten up a bit.  We also got word that New Zealand’s largest dairy exporter, Fonterra, cuts farmer payout forecasts which Kiwi traders also took as another signal to sell today.

Another reason for the decline in NZD/JPY is the recent geopolitical fears playing out in favor of safe haven currencies (Japanese Yen, U.S. Dollar, etc.) as currency traders move from high-yielders like the Kiwi.  The tensions do not seem to be subsiding as Europe may soon enact fresh sanctions on Russia, and as the military actions by Israel into Gaza may develop into a longer conflict than previously thought.

Even though I’m bullish the Kiwi, with so many fresh catalysts for weakness, I decided to zoom out to the daily forex charts to see if I could find long-term opportunities to play: the trend higher, monetary policy divergence outlook, and positive interest rate differential.

On the chart above, I think I found a nice opportunity as the market approaches the 86.00 major psychological handle (which strongly held as support at the end of May 2014) and the rising 200 moving average (purple line).  The last time the market and the 200ma met was at the beginning of February, which held and reversed the market higher (partly due to strong sentiment shift).

For now, this pair is going into my watchlist and if/when the market does test either/both the 86.00 handle and 200ma, I’ll see what the market drivers are at the time and make the decision on whether the probability and potential return is worth the risk.  Stay tuned!


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