Tis the season to be long FX carry - NZDJPY

Tony Sycmore
By :  ,  Market Analyst

Record highs (again) for the S&P 500 overnight as the renewed optimism surrounding the U.S. – China trade deal left last weeks pullback well short of what might otherwise have been expected. Although bullish sentiment is at elevated levels, there does appear to be an element of FOMO creeping into equity markets.

The strong performance of stocks during 2019 has also translated into good returns for FX carry trade strategies. According to U.S. bank, JP Morgan, FX carry trade strategies are on track to deliver their second-best performance in a decade.

For those unfamiliar with FX carry trading, returns are generated from two main sources.

The first is via the interest rate differentials between two countries. The idea is to buy the currency that has a higher interest rate relative to the one that is sold. The difference in interest rates is a profit. The second is via spot returns. In this case it helps to look for a currency pair that is in an uptrend in favour of the higher yielding currency over the funding currency.

In the G10 FX space, the JPY and CHF are two used as funding currencies, while the AUD, NZD, and CAD are traditionally the most popular high yielding currencies. Despite interest rates in Australia, New Zealand and Canada currently being at historically low levels, interest rates in those countries remain higher than interest rates in Japan.

With that in mind let’s turn to the charts and take a look at NZDJPY for a potential FX carry trade.

NZDJPY has spent the past four months capped by trendline resistance currently near 70.00. After the release of stronger than expected NZ retail sales data yesterday, NZDJPY appears to be on the verge of breaking higher.

I would suggest using a move above the June low at 70.26 as further confirmation that NZDJPY has broken out of its congestion pattern, targeting a move towards the 72.30 quadruple low from September 2018. The stop loss could be placed initially at 69.60 and trailed higher should the spot price perform as expected.

Tis the season to be long FX carry - NZDJPY

Source Tradingview. The figures stated areas of the 27th of November 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Related tags: Forex

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