Giles Coghlan LLB, Lth, MA
Financial Source
The NZDJPY pair has broken higher through resistance at 82.50 as flagged here on the strong fundamental picture for the pair. That fundamental picture remains in place as there are continued reasons for NZD strength and JPY weakness.
The reason for NZD strength
The New Zealand dollar has significant reasons for strength:
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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.
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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.
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Unemployment is low at 3.2%.
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New Zealand bond yields continue to surge higher.
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Interest rate markets are pricing in nearly 8 interest rate hikes from the RBNZ this year for a total of nearly 200 bps. The current interest rate level is at 1.00%.
The reason for Japanese Yen weakness
The Japanese Yen has significant reasons for weakness:
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High oil prices weaken the Yen as it is a net importer of energy.
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The BoJ has pledged to keep the Japanese 10-year yields within the +0.25% -0.25% band.
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Inflation is still relatively low in Japan with the headline at 0.9%. The lowest of the G8.
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The BoJ was quite happy with a weak JPY and the powerful easing policy remains in place which all should keep the JPY structurally weak over the medium term.
The most obvious place for dip buyers to step in would be against the 82.50 level as that is both a daily high and a weekly trendline area. Furthermore, it means that stops can be fairly closely placed under 81.90 while allowing for another potential leg higher as outlined below.
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