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A "Historic" Bear Move Setting up in NZD/JPY

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Talking Points:

  • Fundamental Factors Impacting NZD/JPY
  • A Multi-Decade Peak Looming Nearby
  • How to Trade a Move of This Magnitude

The 25-basis-point (bp) cash rate upgrade by the Reserve Bank of New Zealand (RBNZ) on March 13, although “telegraphed” by the RBNZ and largely expected by the markets, acknowledged the strength of the New Zealand dollar (NZD) against its currency counterparts, and was also intended to combat inflationary pressures and rising Kiwi commodity prices (especially dairy).

RBNZ Governor Graeme Wheeler said that further rate hikes would be dependent on economic data, and although another rate hike is expected at this month’s meeting (April 23), it is not yet certain that other rate hikes will follow. This begs the question of whether the impact of future RBNZ rate hikes has already been priced in by the market.

Looking at the below chart (courtesy of FXTop.com), which shows 30 years’ worth of price action in NZDJPY, we immediately notice that the 100.00 mark has been respected since the beginning of 1986. Further down, the key psychological price level (90.00) has only been pierced once since 1991, making this a very significant level as well.

This year, at the start of April, NZDJPY rose within striking distance of the key 90.00 level on the back of a bullish wave that originated in September 2012. Looking at the chart, however, we see that the current NZDJPY price level (running just shy of 88.00) is exactly the same level as the 1997 peak (87.99), which was also the site of a massive reversal that ultimately produced the all-time low of 42.38 in NZDJPY.

Guest Commentary: Long-Term Price Action in NZD/JPY

The long-term chart of NZD/JPY shows that the pair is currently trading close to a multi-decade top.

There are different ways to interpret this price action, but this could be especially appealing for long- and medium-term traders alike when we further assess the previous three reversals in NZDJPY.

If measured from peak to trough, these moves span 3,796 pips (1990 – 1993), 4,561 pips (1997 – 2000), and 5,311 pips (2007 – 2009), respectively. The average of these three reversals is a momentous 4,556 pips, and considering NZDJPY has begun a slight bear move from just shy of the key 90.00 level (although this is by no means a confirmed downtrend), another such reversal would target the 44.44 level, which is slightly below the 2009 low.

Each of the three historic bear moves has been larger than the previous one, with the second exceeding the first by 765 pips, and the third outpacing the second by 750 pips. Averaging these out and adding in the value of the last bear move would give a massive potential down move as large as (757 + 5,311) 6,068 pips!

As such, if beginning from the 90.00 level, a reversal of that magnitude would produce a low of 29.32, which would blow away the previous all-time low in NZDJPY.

How to Trade a Move of This Magnitude

Given that the first two bear moves each took about four years to complete, and the third one about two years, we can draw a Fibonacci retracement trend line from each peak to each trough and then use the derived levels to break things down to yearly targets, if not monthly ones.

Unfortunately, most trading software will not stretch back further than the early 2000’s for NZDJPY, which leaves only the last of the three reversals (the 2007 high to the 2009 low) for assessment.

As the monthly chart below shows, the 76% retracement would be around 85.00, the 61% around 77.00, and the 50% around 71.00. This would help provide closer targets to work from, and to confirm each time whether the large-scale reversal was maturing as anticipated. It would also give valuable confirmation at each level, which would help traders add to longer-term short positions if looking to scale in gradually.

Guest Commentary: Key Fibonacci Levels and Slow Stochastics for NZD/JPY

Key Fibonacci retracement levels for NZD/JPY can be used to identify potential targets for new short positions in the pair.

The January 2013 candle on the above monthly chart shows that price occupied the space between the 50% and 61% levels for the entire month, meaning that these price levels are definitely to be watched.

However, other levels do exist, including the 69.00 area, which acted as support between 2004 and 2006, and then served as resistance between 2010 and 2012. As a result, drawing further lines on the chart will aid in the sub-division of the huge range into smaller-sized targets, especially for the placement of stop and limit orders.

An initial short signal has already been triggered in that the 90.00 level has been rejected, and Slow Stochastics (15, 5, 5 settings) have already shown the blue line crossing the red to the downside.

Furthermore, the current peak in SSD is lower than that of a year ago, signaling a divergence with the bullish trend on the chart. We are already short from today, with the first target set just above the 76% retracement (around 85.00). The overall risk profile of this trade is an even 1:1.

By Francesco Sani, Guest Contributor, DailyFX.com

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EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

Confidence is essential to successful trading, see this new guide – ’Building Confidence in Trading’.

Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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