The combination of a stir in risk sentiment and the RBNZ’s rate decision has sent the kiwi dollar into an aggressive rally over the past 24 hours. However, risk appetite is likely to cool as the weekend approaches with the G8 meeting scheduled and an examination of central bank Governor Alan Bollard’s commentary reveals a decidedly dovish bias for the future.
[B]Why Would NZDJPY Hold a Range?[/B]
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 63.30 (Fib, Double Top)[/B]
[B]-Range Bottom: 30.35 (Trend, Fibs, Pivot)[/B]
· Over the past 24 hours the New Zealand dollar has been spurred to extraordinary rallies. However, unlike previous shifts of this magnitude, this drive was not catalyzed by general risk appetite. Rather, this rally was instigated by the RBNZ’s decision to hold its benchmark lending rate unchanged. This volatility will naturally fade without further support. What’s more, the commentary that accompanied the decision was decidedly dovish.
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· Technically, most signs behind NZDJPY are pointing up. Since the beginning of February, this pair has advanced with few severe corrections. There is a clear grounding for support down at 60.35; but resistance has been newly developed. With the volatility over the past day, a double top was put in around 63.35 – just below a major 50% Fib level.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: Entry orders will be placed at 63.15 to take advantage of the burst in volatility.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 63.75 is purposely tight as we expect a quick turn before week’s end. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (60) at 62.55 and the second[/B][B] target will be 61.55. [/B]
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Trading Tip – The combination of a stir in risk sentiment and the RBNZ’s rate decision has sent the kiwi dollar into an aggressive rally over the past 24 hours. However, risk appetite is likely to cool as the weekend approaches with the G8 meeting scheduled and an examination of central bank Governor Alan Bollard’s commentary reveals a decidedly dovish bias for the future. This presents a unique opportunity for NZDJPY. The fundamental mix that catalyzed the pair to a more than 225 point rally is likely to recede and allow the market to reset its equilibrium. It just so happens that the haze of event risk is lifting where the market can make an easy transition to technicals. Today’s high has produced a double top with the daily candle that opened the month; and all this just below the mid-point of the May 2008 to February 2009 bear wave at 63.75. Clearly, there is risk in this position. Another burst of volatility could force a break; but it would take a significant shift in risk sentiment to sustain such a move. Nonetheless, we have set our stop very tight as we expect this position to setup and play out over the next 24 hours as we want to avoid holding it into the weekend. We will cancel all open orders by the start of the US session or should spot hit 62 before we are entered and close all live positions before the weekend. [/B]
[B]Event Risk for New Zealand and Japan[/B]
[B]New Zealand – [/B]The pinnacle of event risk has come and gone for the New Zealand dollar. The RBNZ rate decision was a much-anticipated piece of event risk as it would define the pace of monetary policy for a currency that is heavily dependent on its yield. However, the outcome of the event was perhaps more complex than the market has allowed for. While the kiwi has initially rallied after the expected hold at 2.50 percent; the commentary that accompanied the announcement was clearly dovish. Among the highlights from Governor Bollard’s notes, he said there was further room for rate cuts and that he doubted rates would rise again until late 2010. Not only does this open the potential to further rate cuts, but it puts the kiwi at a disadvantage should other central banks turn to a hawkish regime more readily. This sentiment will no doubt filter into risk considerations. Otherwise, the market will still have its taste of event risk – and even a potential market mover within our open order time frame. Retail sales for April will give a good sense of consumer health –a key component of growth. After the weekend, service and manufacturing sector activity will fill out the growth update.
[B]Japan – [/B]Risk trends are without doubt the primary driver of the Japanese yen over the coming week. The greatest concern for sentiment is the G8 finance minister meeting that begins on Friday. While there is a low probability that they will release commentary that could trigger volatility in the market; any rhetoric that does come out of the meeting could revive direction on a very prominent trend that has just recently died down. Mention of government exit plans from their financial bailouts, replacing the US dollar as a reserve currency, what to do with toxic debt or the impact of massive budget deficits could generate fundamental volatility. In other news, the economic docket may attract attention of its own. A rate decision and policy officials’ growth assessments will be closely watched.
[B]Data for June 12 – June 19[/B]
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[B]Data for June 12 – June 19[/B]
[B]Date (GMT)[/B]
[B]New Zealand Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Japan Economic Data[/B]
Jun 11
Retail Sales (APR)
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Jun 12
Consumer Confidence (MAY)
Jun 14
Performance of Services Index (APR)
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Jun 16
BoJ Rate Decision
Jun 14
Manufacturing Activity (1Q)
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Jun 17
BoJ Monthly Report
Jan 15
Non Resident Bond Holdings (MAY)
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Jun17
Cabinet Office Economic Report