With volatility still on the downswing, I decided to zoom out to the higher time frames and spotted this sweet range setup on NZD/JPY. Will previous resistance hold and what can take this pair down from the top?
NZD/JPY Range Reversal Lower?
This is mainly a simple technical setup as NZD/JPY re-tests a previously strong resistance area. The 83.00 handle has turned back the bulls several times in the past, most recently in the form of a double top at the beginning of 2017. We also saw the bears holding the line back in the latter half of 2015, so this is definitely a setup I had to take a nibble on.
Fundamentally, the Japanese yen has been beaten down on a mix of rising short-term bond yields and the Bank of Japan looking to do what it can to keep bond yields near zero. On the other side of the pair, the Kiwi has seen broad support, likely on its interest rate differential advantage and strong correlation with global risk sentiment. But I think the Kiwi could see its rally could stall or maybe even reverse now that it’s testing a significant technical area.
First, I think today’s weak quarterly CPI read from New Zealand (0.0% vs. 1.0% previous / 0.2% forecast) could be a catalyst for possible profit taking or fresh short players in the market. Also, based on recent Commitment of Traders data, Kiwi futures are hitting 20-year highs in terms of net positioning by being net long 31,905 contracts, far above the 20K level where market tops were seen in the past.
And for Japanese yen futures, we just saw an extreme last week with currency futures traders net short the yen by -112,125. Extreme positioning for the yen hasn’t been as reliable an indicator for market turns like with the Kiwi, but it’s definitely something to note.
With all this said and the potential for some positive comments from the Bank of Japan on the Japanese economy this week at their upcoming meeting, I think the odds are pretty good that the broad extended moves on both currencies could see a pullback, and possibly a dip in NZD/JPY from here.
So, I’m putting short orders up, with a stop and soft target a little more than one WATR to give it some breathing room and/or take quick profit around the BOJ event this week. Here’s what I’m doing:
Short half position NZD/JPY at market (81.90) , max stop loss at 84.25, initial target at 79.75 for a 1:1 return-on-risk potential.
But I’m really looking for a big payout with my max target being the bottom of the longer-term range (around 73.00), which I think could be possible if NZ inflation remains weak and if the latest pullback in expansion in recent PMI data from New Zealand turns into a pullback in the hard data like today’s CPI. Also, if broad economic data starts to weaken as we’ve been seeing with recent global inflation reads, we could see a turn in global risk sentiment, which would likely support the Japanese yen.
I’ll be risking only 0.5% of my account on this position and if the trade goes my way, I’ll look to add to this small trade (and roll my stop) to maximize my potential gain to well beyond 4:1 return-on-risk. Stay tuned!
As always, 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 simply follow what I do.
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