nzdjpy risk of short term mean reversion decline as rbnz looms 1854532017

Later today at 2100 GMT, New Zealand central bank, RBNZ will announce its latest monetary policy decision where market consensus is expecting a status quo on its benchmark policy interest rate (official cash rate-OCR) to remain at a record low of 1.75%.

In the previous meeting held on 11 May 2017, RBNZ shocked the markets by issuing a slighlty more dovish tone in its monetary policy statement. It stated that the recent spike in inflation is transitory in nature and revised down its medium-term inflation forecast to 1.1% y/y in Q1 2018 from its February meeting projection of 1.3% y/y due to muted wage growth. The NZD/USD plummeted by 1.8% from 0.6943 to print a current year to date low of 0.6818 before it recovered sharply due to a weak USD.

Recent data on economic activity had been lacklustre where New Zealand’s Q1 GDP expanded at 0.5% q/q which was below RBNZ’s forecast of 0.9% q/q. Also, the housing market continued to slow where sales in Auckland was down 27.5% y/y in May. In contrast, on the positive side, we had household inflation expectations rose to a two-year high.

Therefore, we expect RBNZ to keep the OCR at 1.75% and maintin a neutrality stance on its monetary poilcy guidance where the NZD/USD is likely to be capped in a range bound environment between 0.7190 and 0.7315 in the short-term.

Now, let’s us take a look at the latest technical elements on NZD/JPY cross pair.

Short-term technical outlook on NZD/JPY

(Click to enlarge charts)

Key technical elements

• The recent 6% rally from its 18 May 2017 low of 76.25 has stalled at a medium-term resistance level of 80.67 which is defined by a confluence of elements. Firstly, the former ranges support area that has been formed on 23 December 2016 to 09 February 2017. Secondly, the 61.8% Fibonacci retracement of the recent decline from 27 January 2017 high to 12 April 2017 low (see daily chart).
• Bearish countertrend signals have surfaced at the 80.67 resistance level. The daily RSI oscillator has reached its overbought region coupled with a daily “Gravestone Doji” candlestick pattern seen yesterday, 20 June 2017. These observations suggest that the recent upside momentum of the medium-term uptrend in place since 12 April 2017 low has started to ease which highlights the risk of a short-term mean reversion/countertrend decline at this juncture (see daily chart).
• The significant short-term support rests at the 79.70/55 zone which is defined by the lower boundary of a short-term bullish ascending channel in place since 18 May 2017 low and the 50% Fibonacci retracement of the recent up move from 30 May 2017 minor swing low to 20 June 2017 high (see 1 hour chart).
• The hourly Stochastic oscillator has reversed down and it is now coming close to an extreme oversold level which the price action of the cross pair may see a minor rebound to retest its 80.55 intermediate resistance (see 1 hour chart).

Key levels (1 to 3 days)

Intermediate resistance: 80.55

Pivot (key resistance): 80.67

Supports: 79.95 & 79.70/55

Next resistances: 81.10 & 83.37

Conclusion

The NZD/JPY may shape a minor rebound first towards 80.55 with a maximum limit set at the 80.67 pivotal resistance. Thereafter, a potential short-term mean reversion/countertrend decline within a medium-term uptrend is likely to materialise for a further slide towards the next supports at 79.95 follow by 79.70/55 next.

On the other hand, a clearance above 80.67 is likely to invalidate the preferred short-term bearish bias for a continuation of its medium-term up move to retest the recent minor swing high area of 81.10 before targeting the significant medium-term range resistance of 83.37.

Charts are from eSignal

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