Opportunity Knocks For The NZDJPY

2019年8月7日

With global equities continuing to be supported by favorable liquidity conditions and little else, it was really just a matter of time before risk assets came under more pressure. The biggest red flag was flying in the bonds market, where global bonds have continued to rally sending yields sharply lower. Equities rallying strong along with bonds is not sustainable, and considering slowing global growth, trade conflicts, and political unrest risk assets have appeared the most vulnerable. The constant flows into bonds highlights the increasing uncertainty and demand for safety.

The current equities decline started when the Fed disappointed doves with only a 25bp cut, delivered with a neutral statement. The decline was accelerated by news of new tariffs that will be imposed on China by the Trump administration. This sparked a sell off of risk assets, and flows into safe havens such as JPY and CHF. The USD missed the boat this go around partly due to the unwinding of the EURUSD carry trade caused by the quick spike in volatility. There were also some EM factors that contributed to the USD decline, but those are outside the scope of what we are trying to convey here. After all, we are here for the NZDJPY.

NZD is a high beta currency strongly tied to the performance of the global economy. It is also directly impacted by the US-China trade conflict, just like its cousin the AUD. Today the RBNZ surprised the market by cutting 50bp (market was expecting 25bp). Soft inflation expectations wiped out any positive the currency picked up on strong employment figures yesterday, business confidence remains very poor, and the RBNZ has even floated the idea of unconventional monetary policy. All of these things should keep the NZD weak over the medium term.

On the technical side, we have now traded through key monthly support, which should now serve as a barrier for any rally attempts. Over the coming months we are looking for continued declines towards 65.00 and then 62.00.