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We have published articles outlining our view of NZD/USD and also USD/JPY earlier today in this article, we want to look at the cross which offers an attractive risk to reward due to the bullish extreme in favor of the NZD.

You can read our previous articles on the fundamentals of both the NZD and JPY in articles we wrote earlier today but it looks to us like the good news is priced in for the Kiwi. The Reserve Bank of New Zealand's official cash rate (OCR) is at 5.5%. The Bank of Japan's short-term interest rate is held at around 0% to 0.1% - this has given speculators not only great carry interest but they have also benefited from capital appreciation as the NZD has moved sharply on the JPY.

 

Of the forecasters we track we can find none that are looking for a big trend reversal in the pair but the problem is the fact they can see no change coming means the good news is priced into the pair So what could cause a trend reversal? Speculators are simply to long of the NZD and this points to limited upside and warns of a major move to the downside.

Sentiment – COT Net Traders Positions

Below we have the COT Net Traders Positions for both the NZD and JPY Against the USD. Speculators are heavily long of NZD and short of the JPY while "smart money" commercials are heavily short. Our views of NZD/USD, NZD/JPY where we expect the NZD to fall on the USD and the JPY to rise; with a breakdown in terms of the cross data.

 nzdcot09

cotbase japanese yen futures cot net positions 8

COT Net Traders Cross Data 

There is no official cross data from the CFTC but you can create it yourself (as all major currencies are traded through the USD and our view is to express the cross as a simple ratio of longs v shorts. In terms of the cross if we were to look at the ratio of longs to shorts we get speculators 9 to1 in favor of longs over shorts while smart money commercials hold a position that is 7.5 to 1 in terms of shorts over longs this gives us a divergence of 16.7 on our cross trading any ratio above 10 will normally interest us and this one at 16.7 is easily the biggest this year.

Bullish extreme - Good News Discounted

The good news is priced in - the market is looking for a hawkish RBNZ and dovish BoJ – Also the market is in risk-on mode at present which sees carry trades in favor and we dont see it getting more risk-on than it is at present so view NZD/JPY as an excellent risk to reward potential short trade.

Technical Analysis

Our view of the key levels of support and resistance to key off are on the chart below.

nzdjpyday09

 

 

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