The number one principle to grasp in FX trading is to pair a weak currency against a strong currency. This article outlines a case for a stronger NZD and a weaker JPY, and the key risks.

The strong: NZD

Three investment banks have now made the case for higher RBNZ interest rates this year.

  • ASB (Feb 01): Project the RBNZ to hike rates to 2.75% by early 2023.
  • ANZ (Jan 19): Projected RBNZ to raise rates to 3.0% by April 2023.
  • Kiwibank (Jan 30): Project the RBNZ to hike rates to 2.50% by November.

The Overnight Index Swaps is currently pricing in 100% probability for a 25bps rate hike on February 23rd from the current level of 0.75%. Rate money markets are looking for 7 rate hikes this year. So, with New Zealand experiencing high inflation and a soaring housing market it seems reasonable to expect the RBNZ to keep their hawkish bias.

The weak: JPY

The Bank of Japan has recently committed to buy an unlimited amount of JGB’s in order to keep the 10-year yield within the +0.25 and -0.25 band. This means that the Bank of Japan is happy to keep JPY weakness on an ongoing basis. So, this should mean that the JPY stays weak against the NZD going forward. The NZ10Y-JP10Y bond yield spread should only widen to the upside and this should drag the NZDJPY pair higher now.

The risk

Bouts of risk-off trading strengthen the JPY. So, with the negative Russin/Ukraine headlines we saw bouts of JPY strength. If Russia does in fact make a move into Ukraine then the JPY will gain further.

The RBNZ tilt is more dovish, or at least not as hawkish as the market is pricing.

Trade parameters