NZDJPY downside bias
Societe Generale were out this week with a NZDJPY short. Their rationale for the trade was that August tends to be good for the yen, Swiss franc, gold and volatility. According to Societe Generale the best G10FX trade in August over the last twenty years is short NZDJPY.
So, I had a look at the pair and can see some decent fundamental reasons for more NZDJPY downside in the medium term.
The case for NZD weakness
The nation's business confidence index rose in July, but could be peaking . The RBNZ inflation expectations also fell to 1.39% from 1.44% in June and the Q3 inflation expectations are due next week. If they print near to the Q2 reading of 1.245 then the pressure is on the RBNZ to increase its bond buying at the August meeting.
The case for JPY strength.
Aside from the seasonal strength for yen the broad dollar weakness is also helping the yen. According to Bloomberg data from the Commodity Futures Trading Commission (CFTC) the US dollar is now heading to register its weakest July since 2010. The CFTC shows that asset managers have added to net long positions on the yen, Canadian dollar and the euro. This is as investors exit the dollar and move into other currencies.
Finally the fears of a second wave outbreak of COVID-19 across Europe is only going to add to the second wave woes of the rise in US cases. Rising global cases would support the case for yen strength.
Technicals and trade outlook
Societe Generale trade parameters were entry at 69.84, target at 64 and stops running above 72.00. Here is a rundown on the monthly, weekly and daily chart.
Monthly trend line rejection
Weekly rejection of 72.00 and trendline
Daily chart with double top reversal pattern forming
Major risks to this outlook?
- An improving NZD domestic picture and above anticipated rise in inflation.
- A fall in global covid-19 cases.
- A return to a 'risk on' market which weakens the JPY and strengthens the NZD
