Trading USD consolidation, Buy NZD/JPY – SG

FXStreet (Barcelona) - Alvin Tan of Societe Generale, explains that with USD set to consolidate and New Zealand’s economy on a growing track, NZD/JPY remains the best trade into the dollar consolidation, suggesting going long on the pair, targeting 94.00 levels.

Key Quotes

“The dollar has been in consolidation mode since mid-March, and the momentum-driven moves in the FX market through much of the first quarter have dissipated.“

“The chief macro driver of the change in the trading climate is the pushing out of market expectations on Fed tightening. The December 2015 Fed Funds futures was pricing in 51bp at the start of March, but current pricing is now 37bp.”

“FX implied volatility however remains elevated, though off its recent highs. In the event that the market were to price Fed tightening out even more, then implied vol is likely to drop further.”

“The extension of the consolidation period and further decline in volatility will benefit the Antipodean currencies, especially the NZ dollar.”

“Unlike many other G10 economies, New Zealand is neither on a rate cut cycle nor biased to further easing. The NZ economy is continuing to grow at an above-trend rate, supported by the construction boom and robust population growth. The NZD would consequently be among the chief beneficiaries of a respite in the dollar trend.”

“We recommend a tactical long NZD/JPY trade on the following bases: 1) dollar consolidation to persist near-term, benefitting NZD; 2) global risk sentiment to stay supported; and 3) the market to start raising expectation of additional BoJ stimulus in H2 2015.”

“Buy NZD/JPY spot targeting 94.00 (the December highs) with a stop on a close below the 200-day MA at 88.95 currently.”