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The NZD/JPY currency pair, which expresses the value of the New Zealand dollar in terms of the Japanese yen, can often be volatile. On the one hand, you have the New Zealand dollar (or NZD) which is traditionally viewed as a commodity currency given the importance of (commodity) exports in the country of New Zealand. And on the other hand, you have the Japanese yen (or JPY) which is traditionally viewed as a safe-haven currency.

NZD is correlated with risk-on activity global markets by virtue of its commodity exposures (major exports include milk and dairy products), while JPY is correlated with risk-off activity, due to the country’s current account surplus, regional political stability, and active domestic investment community. Japanese investors are eager to sell the yen short in order to purchase higher-yielding currencies and securities abroad (the Bank of Japan’s short-term rate is still negative at -0.10%).

Therefore, the NZD and JPY are naturally negatively correlated; we can see this movement in the chart below, which shows NZD/JPY price action (using daily candlesticks) in combination with NZD/USD (blue line) and JPY/USD (red line). We can use USD as a common denominator here, to single out the negative correlation effect; as NZD rises, JPY tends to fall, and vice versa.

(Chart created by the author using TradingView. The same applies to subsequent candlestick charts presented herein.)

In the chart below, we contextualize price action within certain bounds; these shaded areas serve as potential support-and-resistance areas (the distance between them being equal). As can be seen, NZD/JPY is currently trading within one of these areas (between approximately 72.35 and 73.10), and hence we should be looking for either a break-out (to the upside) or a break-down (towards 69.35, which is where the first major support below begins).

NZD/JPY Support and ResistanceIn light of the pair’s 100-day moving average, we should favor downside at this juncture. In the updated chart below, the sloping black line represents the 100-day moving average, while the bottom panel tells us the distance between the current price and the 100-day moving average. Notice that the distance is approaching extremes. While these extremes can persist, and do not necessarily indicate the turn of a trend, it does add weight to the argument of downside (rather than significant upside in the near term).

NZD/JPY Distance from 100-day Moving AverageClosure of this gap, between the current price of around 72.80 and the 100-day moving average of under 70.00, could be achieved in the near term. The moving average is on the climb, however at the very least we should see the spot price of NZD/JPY fall to the midpoint of the current shaded area, and the next area of support below it (i.e., the midpoint being 70.80, as shown by the blue line in the chart below).

NZD/JPY vs. Range Midpoint of 70.80Notice that the price almost reached 70.80 on January 8, 2020, but instead retreated back to this current area between 72.35 and 73.10. After this short period of stabilization, this author believes that the midpoint of 70.80 will be achieved. Further downside towards 69.35 could subsequently occur, although this would require a sharper move which would probably need to be accompanied by broader risk-off activity (such as a sell-off in U.S. equities).

The NZD/JPY pair is sensitive to risk-on sentiment globally, and hence moves in oil prices and other commodities are also important. The chart below, for instance, shows the 20-day moving average of the ratio between oil and gold (shown by the green line, set against the far-right y-axis). As oil is correlated with risk-taking activity, and gold is viewed traditionally as a safe-haven asset, it makes sense to find a positive relationship between the oil-and-gold ratio and NZD/JPY spot prices.

Oil/Gold Ratio vs. NZD/JPY Price ActionThe correlation may not be especially strong, but it is evident, and the moving average of this oil-to-gold ratio does seem to possess some predictive value (i.e., it has utility as a near-term leading indicator of risk-on/risk-off FX pairs). Most recently, the ratio has (on average) been ticking down (as illustrated in the chart below); this strengthens our bearish view on NZD/JPY.

Unless we get any significant risk-off activity globally, the NZD/JPY pair is unlikely to crash sharply at this juncture. On both the upside and downside, we should continue to expect moderate activity within these trading ranges. However, as the pair has recently stabilized within one key area, downside should now be in favor in light of NZD/JPY prices being quite high above its 100-day moving average (relative to its recent price history) and as relative price action in oil and gold signals potential downside.

Also of important note is that the central bank meetings (as shown in the table below) of the Bank of Japan (the BOJ) and the Reserve Bank of New Zealand (the RBNZ) are coming soon: the BOJ meets on January 21, 2020, and then subsequently the RBNZ on February 12, 2020.

Central Bank MeetingsThe BOJ is not likely (or generally expected) to move its short-term rate; it has kept it unchanged since January 2016 at negative -0.10%. The bank will probably continue to sound supportive and accommodative, yet while volatility can be expected on January 21, this monetary policy meeting is unlikely to produce an outsized move in any particular direction for yen crosses.

The RBNZ meeting should be closely watched, however, given the recent surge in the prices of most NZD crosses; something I have drawn attention to recently, such as in my recent article covering NZD/USD in which I successfully predicted downside subsequent to year-end, and also my more recent article indicating NZD/CAD downside. There is a possibility that the RBNZ could surprise markets in order to soften its currency, whose price is important with respect to ensuring export-price competitiveness internationally.

My bias for NZD/JPY is moderately bearish over the short-to-medium term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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