Sell NZD-JPY for target of 76.00 – Standard Chartered

Analysts at Standard Chartered are recommending to go short on NZD-JPY cross with the following parameters

“Spot levels – entry: 81.60, target: 76.00, stop-loss: 83.80”

Key Quotes

“The NZD trade-weighted index (TWI) has rallied around 5% from its May lows and is again approaching multi-year highs seen in February. The currency appears overvalued on dairy prices, which have weakened since May. Recent NZD strength is likely to renew concerns at the Reserve Bank of New Zealand (RBNZ). The RBNZ’s dovish stance and strong calls for a weaker currency were primary drivers of NZD weakness in February-May. The market saw the RBNZ as having softened its stance on the NZD at its recent meetings – we do not agree with this assessment. The central bank re-introduced its call for a weaker currency at the June meeting, saying a weaker NZD “would be helpful” (though not going as far as to say it was “needed”). We think further currency strength would be self-defeating by making the RBNZ more dovish.”

“We also believe that the market continues to price in excessive policy tightening by the RBNZ. The market has pared its rate-hiking expectations since the start of the year, as the central bank has signalled a prolonged policy hold. However, more than one hike is still priced in over the next 12 months. We believe this is premature and expect the RBNZ to keep policy on hold over this period. We expect a further decline in rate pricing to weigh on the NZD.”

“USD-JPY has rebounded more than 3% since the June FOMC and now appears overvalued on 10Y US/Japan real-yield differentials. We believe further USD-JPY gains are unlikely without real-yield support.”

“Risk correlations

We also like short NZD-JPY as a hedge against potential risk aversion due to a pickup in global bond yields or further commodity weakness. Bond yields were pushed higher this week after comments from European Central Bank President Draghi and US Fed Chair Yellen were perceived as hawkish. A further increase in bond yields may weigh on global equities. We are also cautious that further commodity weakness may weigh on risk assets. Short NZD-JPY fits the bill, in our view. The currency pair has had close to a 40% correlation with the S&P 500 and MSCI emerging-market (EM) indices over the past 60 trading days, and the pair is also overvalued on valuation metrics.”

“Technicals

Technical indicators suggest potential NZD-JPY weakness ahead. The pair has been trading weak after failing to breach the long-term trend-line resistance which has held since late 2014. NZD-JPY also appears overbought on daily Relative Strength Index (RSI).”