The New Zealand dollar (NZD) and the Japanese yen (JPY) are two major global currencies that traders and investors often watch closely. In this article, we will take a macroeconomic level analysis of the NZDJPY currency pair, which is the exchange rate between the New Zealand dollar and the Japanese yen.
We will examine the factors that drive the value of the NZDJPY and how changes in the global economy can affect the exchange rate. Additionally, we will also look at the historical performance of the NZDJPY, as well as potential future trends.
This article aims to provide a comprehensive overview of the NZDJPY currency pair and help readers understand the broader macroeconomic forces that influence its value.
NZDJPY Fundamental Analysis
Fundamental analysis in forex is a method of evaluating the value of a currency by analysing economic and political factors that can influence its value. This type of analysis aims to identify the underlying value of a currency by looking at factors such as interest rates, GDP growth, political stability, and trade balances.
One of the critical elements of fundamental analysis in forex is interest rate differentials. This refers to the difference in interest rates between two currencies. A currency with a higher interest rate than another will generally be more attractive to investors, and its value is likely to appreciate.
Another essential factor is GDP growth. A country with a strong and growing economy will likely have a strong currency, indicating its overall economic health.
Political stability is also essential to consider when conducting a fundamental forex analysis. Countries with stable political situations tend to have more stable currencies, while those with political turmoil tend to have more volatile currencies.
Trade balances are also essential to consider, as a country that runs a trade surplus (exporting more than it imports) generally has a stronger currency than a country that runs a trade deficit (importing more than it exports).
Overall, fundamental analysis in forex is a method of evaluating the underlying value of a currency by analysing various economic and political factors that can influence its value. Traders and investors can use this information to make more informed decisions when buying and selling currencies in the foreign exchange market.
Logikfx Technology Summary
Logikfx technology helps traders quickly summarise fundamental analysis for all tradable currencies. Below is a quick summary of describing what's happening with NZD versus JPY:
The NZDJPY currency pair shows signs of a strong New Zealand dollar and a weak Japanese yen. Macroeconomic indicators such as GDP differentials, interest rate differentials, and commitment of traders differentials are all pointing towards a long-term bullish bias for the NZDJPY. This means the New Zealand economy is performing well while the Japanese economy lags.
The New Zealand dollar is considered a "leading" currency, meaning it tends to perform well when the global economy expands. The country's GDP growth is also outpacing Japan's, another positive sign for the NZD. On the other hand, the Japanese yen is considered a "safe haven" currency, meaning it tends to perform well during economic uncertainty. However, with the Japanese economy struggling, it's not surprising to see the yen losing ground against the NZD.
Interest rate differentials also play a role in the NZDJPY's current performance. The Reserve Bank of New Zealand (RBNZ) has been raising interest rates, while the Bank of Japan (BOJ) has kept rates low. This makes the NZD more attractive to investors, as they can earn a higher investment return.
Furthermore, Commitment of Traders' differentials (COT) also shows a bullish bias for the NZDJPY for the long term, which is an indicator of the positions of significant traders in the market.
Overall, the macroeconomic factors indicate that the NZDJPY currency pair is likely to continue its upward trend, making it an attractive opportunity for traders and investors.
Macro Currency Strength Meter (MCSM) Analysis
The macro currency strength meter is a significant tool for analysing a forex pair. It quickly considers hundreds of fundamental indicators to discover a currency's overall strength or weakness.
Below is the latest MCSM summary for NZDJPY:
Based on the Macro Currency Strength Scores provided, it is clear that the New Zealand dollar (NZD) has been performing better than the Japanese yen (JPY) over the past 7 weeks. The changes in scores for the NZD have been consistently increasing, with the highest score of 6.6667 on 21/01/23, while the scores for the JPY have been consistently decreasing, with the lowest score of -3.8462 on 14/01/23. This indicates that the NZD is relatively stronger than the JPY over the past 7 weeks.
Looking at the trend of the scores, we can see that the NZD has been steadily improving over the past 7 weeks, with the score moving from -73.333 on 17/12/22 to 6.6667 on 21/01/23. On the other hand, the JPY has been gradually weakening, with the score moving from 15.385 on 17/12/22 to -3.8462 on 21/01/23.
From this trend, it can be predicted that the NZD will continue to gain strength while the JPY will continue to weaken in the short term, as the scores consistently show positive scores for the NZD and negative scores for the JPY. However, it's important to note that the market is always subject to change, and other factors, such as economic or political events, may influence the direction of the currencies.
Gross Domestic Product (GDP) Differentials
GDP differentials refer to the difference in economic growth rate between two countries or regions. In the context of the forex market, GDP differentials can be used to compare the economic performance of two countries and how it may affect the value of their currencies.
Traders can use GDP differentials to analyze the forex market by comparing the GDP growth rate of the countries whose currencies they are trading. A country with a higher GDP growth rate generally has a more robust economy and a stronger currency. A country with a lower GDP growth rate will have a weaker economy and currency.
Traders can use this information to make predictions about the direction of a currency pair by looking at the relative economic performance of the two countries. For example, suppose a country's GDP growth rate is significantly higher than another country's. In that case, traders may predict that the currency of the stronger-performing country will appreciate against the other.
Additionally, GDP differentials can also be used with other indicators, such as inflation rates and interest rates, to gain a more comprehensive understanding of a country's economic performance and how it may affect its currency.
However, it's important to note that GDP differentials are not the only factors that can affect the value of a currency and should be considered alongside other indicators and market conditions. Traders should also be aware of any potential changes in the economic conditions of the countries they are trading, as they can significantly impact the currencies' values.
Below is the GDP differential for NZDPY:
For the majority of years between 2011 and 2022, Newzealand has consistently been producing a higher GDP growth rate versus Japan.
Using the International Monetary Funds' (IMFs) latest world economic outlook for 2023, we notice that the growth of Newzealand will exceed Japan once more. For traders, this indicates a 'hot' money flow from JPY (relatively weakening economy) to NZD (relatively strengthening economy).
New Zealand vs Japan Trade Analysis (Imports vs Exports)
Trade analysis between two economies is important in forex trading because it can provide insight into the economic relationship between the countries and how it may affect the value of their currencies.
Traders can drill further down into which specific business or commodity is responsible for most of the country's imports or exports.
Once the business or commodity is discovered, its performance is an excellent benchmark for the performance of its native currency.
Using the Observatory for Economic Complexity, we can quickly find each country's trade balance compositions. Let's take a look at what that looks like for Newzealand and Japan:
New Zealand's Exports:
From this, we can draw two conclusions:
NZD makes a lot of its international revenue from selling concentrated milk.
JPY makes a lot of its international revenue from selling cars.
For the sake of keeping this brief, we will take a look at (2). However, it is best to practise considering both (1) and (2) for your analysis.
Toyota Motor Corp is the largest manufacturer of cars in Japan, so their performance will heavily impact the demand for the Japanese yen.
If Toyota sells more cars, it's likely more international countries will be accumulating JPY to service their purchases. And on the flip side, if Toyota corp is underperforming, there will be a lower international requirement for JPY.
So, let's take a look at how Toyota has been performing since 2022:
In the past 12 months, we've seen a decline in the share price of over 20%. It would be sensible for a forex trader to consider a decline in JPY demand then, and therefore a potential short bias on the currency.
Interest Rate Differentials
Interest rate differentials are essential when looking at the forex pair NZDJPY because they can significantly impact the relative value of the two currencies. When the interest rate in New Zealand is higher than the interest rate in Japan, it can make the New Zealand dollar more attractive to investors, which can lead to an appreciation in the value of the NZD relative to the JPY.
Conversely, when the interest rate in Japan is higher than the interest rate in New Zealand, it can make the Japanese yen more attractive to investors, which can lead to a depreciation in the value of the NZD relative to the JPY. Therefore, changes in interest rate differentials can have a significant influence on the price of the NZDJPY currency pair.
Considering the latest interest rates for JPY and NZD, we can see a difference of 3.6% in favour of New Zealand.
Over the longer term, this would signify a long bias on NZDJPY.
Commitments of Traders Analysis
The Commitment of Traders (COT) report is a weekly report issued by the Commodity Futures Trading Commission (CFTC) that provides information on the size and direction of positions held by different groups of traders in the futures market. When analyzing the COT report for the NZDJPY currency pair, traders can gain insight into the sentiment and positioning of different groups of market participants, such as large speculators, commercial hedgers, and small traders.
For example, suppose the report shows that large speculators (such as hedge funds and institutional traders) have a significant net long position in the NZDJPY. In that case, it may indicate that they are bullish on the currency pair and expect it to rise in value. On the other hand, if commercial hedgers (such as farmers or manufacturers) have a significant net short position, it may indicate that they are bearish on the currency pair and expect it to fall in value.
By analyzing the COT report, traders can identify potential trends and shifts in market sentiment, which can help make trading decisions. However, it's important to note that the COT report is a lagging indicator and should be used with other technical and fundamental analyses.
In this example, on the 17th of January 2023, we can say that hedge funds are net-long on NZDJPY. However, this is a small long position than the previous week.
Although this is a bullish sign for NZDJPY, the shift from last week is something to keep an eye on.
NZDJPY Technical Analysis
Technical analysis, in forex, is the method of evaluating a currency pair by analysing market activity statistics, such as past prices and volume. As the forex market is decentralised, it's difficult for any trader to gauge the market's volume truly. As such, price analysis is the predominant method preferred by many over volume analysis.
For NZDJPY as of 26 Jan 2023, here's a quick technical overview:
The short-term downtrend has halted and price is starting to create a market bottom.
A recent market high has been broken, giving encouraging signs a potential bull run will occur.
From a fundamental and technical standpoint, there is a consensus for an uptrend. I would recommend doing your research before entering any trades and using this to help you understand the methods we apply at logikfx.
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