Play The Range
The unexpected move last week by the Bank Of Japan to cut rates into negative territory for the first time in the country’s history spurred a sharp reaction across the JPY complex with JPY futures falling over 250 pips on the move. This violent market reaction has dragged many pairs in the complex into interesting levels.
With the RBNZ deciding to leave rates unchanged at their recent meeting, some of the immediate bearish pressure on NZD has been relieved allowing for a correction higher in NZD.
However, the monetary policy statement which accompanied the last meeting highlighted an uncertain future, with RBNZ Governor Wheeler noting that:
“Further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.”
In the context of inflation, which the RBNZ expect to stay lower for longer over 2016, the central bank also noted that:
“Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range.”
Trade Idea
Having recently tested key horizontal support at the September 2015 low (74.40) and long-term rising trend line support stemming from the 2009 lows NZD/JPY has managed to sustain a bounce higher. The reaction from this support area has seen NZD/JPY carving out an inverse head and shoulders basing pattern. The break of the neckline resistance area should see price well supported on a retest where demand is likely strong enough to drive another test higher.
I will be monitoring price action at a test of 77.70 to buy, in line with bullish Order Flow and VWAP support, with a stop below the recent low targeting a move into 79.30s initially.
Alternatively If price breaks higher before retesting the 77.70 breakout area I will look to sell a retest of key overhead resistance at 79.30 with a stop 81, targeting a move back down into the 77.70 area. 