As we stated last week, NZDJPY has been unstoppable lately. The pair’s strength has been underpinned by a divergence of monetary policy expectations between Japan and NZ, with the former aggressively expanding its easing program while the latter prepares to reengage its tightening cycle.
This morning NZDJPY received another boost which sent it to a new 7-year high. This time around it was better than expected economic numbers out of NZ. Retail sales jumped 1.5% q/q last quarter, beating an expected 0.8% q/q rise. Given that NZ’s retail sales numbers are only released once a quarter, as opposed to one a month like many other countries, they tend to take on more significance and can have more of an impact on price.
NZDUSD immediately jumped through a short-term resistance zone around 0.7940. The pair has since pulled back from its post-data highs, but this is more due to widespread USD strength than anything else. Meanwhile, NZDJPY is still looking overbought on some metrics – which isn’t surprising given the pair’s recent performance – but we still favour long-term strength in the pair.
From a fundamental perspective, the NZ dollar is looking very strong against a yen that is looking decidedly weak. The biggest threats to the former currency appear to come from its own central bank and falling commodity prices, with the RBNZ very concerned about the threat that a strong exchange rate will have on trade exposed sectors of the economy, thus we may see the RBNZ attempt to weaken the currency through direct intervention in the FX market. This has proved successful in the past in temporarily weakening the kiwi, but it’s not a solution to fight long-term strength.
Eyes on Japan’s GDP numbers
Nonetheless, GDP figures out of Japan today (2350GMT) will are a very important indicator for where policy may be heading in the Island nation. Current expectations are that the economy grew a seasonally adjusted 0.5% q/q last quarter and at an annualised pace of 2.2% q/q. This is better than the prior quarter’s massive 1.8% q/q fall in growth, bringing the annualised figure to -7.1%. This marked the worst period for the economy since the financial crisis - even worse than during the immediate aftermath of 2011’s devastating earthquake. While the economy is expected to have rebounded in Q2, we aren’t expecting a ‘healthy’ figure.
The notion that Abe may push back a planned increase in the sales tax isn’t new, but the market isn’t a 100% sure that Abe is going to admit defeat. If Q3 growth numbers do disappoint, it will most likely be the final nail in the coffin for Abe’s current plans for the sales tax. In which case, the yen may retreat as the market looks to Tokyo to admit that the economy isn’t doing as well as previously thought (for obvious political reasons, Abe won’t come out and say this directly).
Source: FOREX.com
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