I did mention in the EURJPY setup previously, that the end of December to beginning of January are often found as volatile periods for many currency pairs, forming their high or low for the following year. It is statistically over 70%. I am going to look here at a NZDJPY short, sticking to the same JPY bias I had in my and EURJPY setup. The main confluences here are the fundamentals and sentiment, which I will get into. Firstly, at the 67.0 level, the speculators had a record net NZD short position, however now at 73.0 we know that the speculators have now been taken out the market – we can see this from the COT net traders data.
If you have a look at September-October time on the COT chart, this is when NZDJPY was at its lows roughly at 67.0, and when the speculators were at recording breaking short levels. However, as we can see now, speculative short positions are almost out the market and this historically leads to a reversal in price.
Also, a key factor this year in helping NZD strength is strong global stock markets. Risk-on sentiment will help the NZD, additionally, the anticipation of the US-China phase 1 deal. I think the deal is already discounted in the price anyway, so even if there is a deal made in January, I do not see it affecting this trade. Trump has actually said yesterday that he will be signing phase 1 deal on January 15. China’s President Xi won’t be attending this signing however Trump will be in Beijing beginning talks for a phase 2 deal after phase 1 is signed. Anyway, this deal is not much of a deal, if you look into the actual details it is practically nothing more than a trade-truce. Because of trade deal optimism, there has been a strong upward pulse for risk-on assets, like the NZD. I think we are going to get a break very shortly to the downside. Generally, the JPY is oversold, and we know from my EURJPY analysis that smart money commercial long positioning is building up. In terms of why investors have been so bearish of the JPY, obviously we have had risk-on sentiment, but people also see the BoJ possibly cutting rates – however I do not think they will not cut rates and I have gone over my reasons for this in detail in my full JPY analysis. In short, the BoJ are almost at monetary policy limits, so they asked the government for fiscal stimulus to boost economic growth and the government agreed to this and just recently the government has announced a massive fiscal stimulus package which will boost which will boost growth massively – meaning the BoJ will no longer need to cut rates. Furthermore, we still do have the potential for risk-off in my view, I think the stock market rally is unsustainable, and I say this because trading volumes are so low yet record highs are being made in a bad environment where there is a global slowdown and Fed cutting rates.
Looking at the NZD chart, the 73.0 level is a very strong monthly level which I have highlighted in purple. I am looking to enter once the price has clearly moved back down through the 73.0 level as highlighted in purple. Round numbers like 73.0 are significant because usually there is a large amount of turbulence, what I mean by this is there is a lot of orders like stop losses, limit orders etc. At the minute the price has pushed above the 73.0 level and now we are sitting on it, the volatility and upward momentum has dropped as indicated by the last 2 indecision candles. There is a chance we could move higher slightly on trade optimism; however, I think that the upside is limited. I think 72.80 is a good entry point, showing us that the 73.0 level has been cleared. In terms of the stop loss, I would look to keep it away from any turbulence and key levels above the entry price, so I would say 142.1 (~130 pips). My first target for this pair is the 70.0 which is the next main key level down which is ~300 pips. With the potential of risk-off, especially going into 2020 where we are bound to see some more dispute with the US & China, and even possibly the EU, I am setting a long-term target at 70.0 for ~600 pips. If we do see a break higher and we moved up to test 74.0, a scenario which I do not rule out, I would take any weakness off that level at all and put our stop loss back above the next key level and targets will remain the same. This scenario is highlighted in orange.
If you have a look at September-October time on the COT chart, this is when NZDJPY was at its lows roughly at 67.0, and when the speculators were at recording breaking short levels. However, as we can see now, speculative short positions are almost out the market and this historically leads to a reversal in price.
Also, a key factor this year in helping NZD strength is strong global stock markets. Risk-on sentiment will help the NZD, additionally, the anticipation of the US-China phase 1 deal. I think the deal is already discounted in the price anyway, so even if there is a deal made in January, I do not see it affecting this trade. Trump has actually said yesterday that he will be signing phase 1 deal on January 15. China’s President Xi won’t be attending this signing however Trump will be in Beijing beginning talks for a phase 2 deal after phase 1 is signed. Anyway, this deal is not much of a deal, if you look into the actual details it is practically nothing more than a trade-truce. Because of trade deal optimism, there has been a strong upward pulse for risk-on assets, like the NZD. I think we are going to get a break very shortly to the downside. Generally, the JPY is oversold, and we know from my EURJPY analysis that smart money commercial long positioning is building up. In terms of why investors have been so bearish of the JPY, obviously we have had risk-on sentiment, but people also see the BoJ possibly cutting rates – however I do not think they will not cut rates and I have gone over my reasons for this in detail in my full JPY analysis. In short, the BoJ are almost at monetary policy limits, so they asked the government for fiscal stimulus to boost economic growth and the government agreed to this and just recently the government has announced a massive fiscal stimulus package which will boost which will boost growth massively – meaning the BoJ will no longer need to cut rates. Furthermore, we still do have the potential for risk-off in my view, I think the stock market rally is unsustainable, and I say this because trading volumes are so low yet record highs are being made in a bad environment where there is a global slowdown and Fed cutting rates.
Looking at the NZD chart, the 73.0 level is a very strong monthly level which I have highlighted in purple. I am looking to enter once the price has clearly moved back down through the 73.0 level as highlighted in purple. Round numbers like 73.0 are significant because usually there is a large amount of turbulence, what I mean by this is there is a lot of orders like stop losses, limit orders etc. At the minute the price has pushed above the 73.0 level and now we are sitting on it, the volatility and upward momentum has dropped as indicated by the last 2 indecision candles. There is a chance we could move higher slightly on trade optimism; however, I think that the upside is limited. I think 72.80 is a good entry point, showing us that the 73.0 level has been cleared. In terms of the stop loss, I would look to keep it away from any turbulence and key levels above the entry price, so I would say 142.1 (~130 pips). My first target for this pair is the 70.0 which is the next main key level down which is ~300 pips. With the potential of risk-off, especially going into 2020 where we are bound to see some more dispute with the US & China, and even possibly the EU, I am setting a long-term target at 70.0 for ~600 pips. If we do see a break higher and we moved up to test 74.0, a scenario which I do not rule out, I would take any weakness off that level at all and put our stop loss back above the next key level and targets will remain the same. This scenario is highlighted in orange.
Comment:
Target reached.