Swaps: Positive swaps on short
Fundamentals: In comparison to the Eurozone, Canadian economy shines a lot brighter. Especially focusing on inflation, Canada’s annual inflation rate was at 2% measured most recently, easing from 2.4% in October while the BoC’s core inflation index was at 2.1%. In stark comparison, the Eurozone’s inflation has been at 0.3% headline and 0.7% core on an annual basis. The ECB’s efforts to stave off deflation will see the Central bank start purchasing bonds which make the Euro single currency a lot weaker. Keeping with this view in mind, and the interest rate differential where the BoC’s overnight cash rate sits at 1%, in comparison to the Eurozone’s 0.05% further adds to the bias.
EURCAD formed a strong support/resistance level near 1.5372 levels in the long term and most recently, attempts to breach this level failed and in the process has formed a down sloping trend line. In the declines from this level, price has formed consistently lower highs and also broke down from the medium term trend line, promptly testing the break out level as well.
There is a strong support zone formed at 1.405 – 1.3916 levels at the moment. The Candlestick chart shows however, that the bearish momentum is building up with last week’s candlestick forming a bearish dark cloud cover pattern right near a previous support/resistance level. This would mark the 5th consecutive lower high being formed.
The major test however comes from the next support level between 1.405 and 1.391 region, which could hold at least until the announcement of QE from the ECB. A break below this support will then clear way for EURCAD to further decline towards 1.36, a minor level and 1.312 another strong support level but one that could be tested with ease.
Expect to see a few more weekly bounces off these levels and a possible fake breach of the major support to catch some late short positions into squeezing them which approximately puts the timeline towards late January 2015’s ECB monetary policy.
Swaps: Positive swaps on longs
Fundamentals: One simply cannot argue with the BoJ when it comes to its vast QQE monetary policy stance. With Shinzo Abe winning a comfortably victory in the recently concluded December 14th elections, the markets view this as an approval of Abenomics by the Japanese voter. Never mind the low turnout or the fact that the opposition wasn’t even ready for elections. Politics aside, we can expect to see BoJ continue to expand its monetary policy in the coming year as they try to lift inflation. On the other hand, in the short – medium term, the RBNZ has put its interest rate hikes on hold. Japan doesn’t rank that high in Kiwi trade and expectations of easy monetary policy from China in the year ahead could help lift the Kiwi Dollar, if not against the Greenback, then at the very least against a much weaker Yen. Although the risks of weaker fundamentals from China and the verbal interventions from the Kiwi Central bank pose a risk to the NZD, relative to the Yen, the downside moves are a lot more limited. And last but not the least; the massive interest rate differentials cannot be ignored.
The NZDJPY has been trading in a longer term uptrend channel after having recently successfully tested the broken resistance at 84.58 levels for support. During its rally to a new yearly high at 93.97, NZDJPY could possibly dip lower to test the next broken resistance level at 88.97 for support.
When looking to the monthly, NZDJPY broke out of a bullish flag pattern a few months ago. We could therefore expect to see a retracement to the break out level at 86.54 before the flag’s eventual target to 97.84 is reached. From the weekly charts, we do know that if price closes below 84.58 or if this level turns to resistance on a break down below, the bullish bets would be off.
In terms of risk reward the NZDJPY has a lot to offer in the coming year but do bear in mind the safe haven status of the Yen, which could strengthen in the event of any unforeseen crisis.