The most important lesson to grasp when trading FX is this one single point. Always trade strength against weakness. Yes, this is an oversimplification. However, it is a particularly helpful one for those new to trading. To see the concept explained you can read more here. This article will demonstrate how you put that into a trade idea with the central bank divergence in place with the RBNZ and the BoJ. The NZ10Y-JP10Y bond yield spread is surging higher and that should lift the NZDJPY over the medium term. Here is the rationale for that outlook below:
The strong
The New Zealand dollar has significant reasons for strength:
- The headline inflation rate is just under 6% at 5.9%. This means the RBNZ is under pressure to hike rates to control very high inflation
- Unemployment is low at 3.2%
- New Zealand bond yields continue to surge higher
- Interest rate markets are pricing in nearly 8 interest rate hikes from the RBNZ this year. The current level is at 1.00%
- The RBNZ has projected the terminal interest rate to be above 3.3% by March 2025. See here for the report on the latest meeting.
The weak
The Japanese Yen has significant reasons for weakness. See here for help on what moves the JPY.
- High oil prices weaken the Yen as it is a net importer of energy
- The BoJ has pledged to keep the Japanese 10 year yields within the +0.25% -0.25% band.
- Inflation is still relatively low in Japan with the headline at a paltry 0.5%
So, this means the NZDJPY pair should keep finding dip buyers. See below for a potential trade idea.
The Risk
The main risk for this outlook is that the BoJ change their policy mandate. One trigger for that could be if imports become too expensive. This could motivate the BoJ to shift their policy stance and it is a risk that should be monitored for from BoJ central bank speakers.
