NZDJPY has been in a downtrend on its 1-hour forex chart, as a descending trend line can be drawn to connect the recent highs. 

The pair just dipped to the 88.00 major psychological support level and is making a pullback to the trend line.

Stochastic is pointing up, indicating that buying pressure is present right now. This could lead to a correction until the Fibonacci retracement levels marked on the latest swing high and low. In particular, the 38.2% Fib level is close to the 88.50 minor psychological mark, which might hold as resistance.

The path of least resistance is to the upside though, at least in terms of fundamentals. New Zealand is faring better compared to the Japanese economy, with the RBNZ set to clarify its monetary policy bias in the next Asian trading session. Data from Japan, particularly that of inflation and spending, have been mostly weaker than expected.

Take note though that recent news surrounding a contamination threat for Fonterra, New Zealand’s largest company, has led the company to halt trading of its shares yesterday. This event could also lead to a drop in milk prices, which might derail the ongoing recovery in the dairy industry.

Risk aversion could also keep the Kiwi’s gains at bay, as emerging economies haven’t been performing so well, forcing some central banks to ease monetary policy. In addition, speculations of Fed tightening in June could also weigh on risk-taking, as this could lead to capital flows towards the US economy.

Shorting at the 88.50 minor psychological level and aiming for new lows might work for a short-term trade, for as long as the current market environment persists. A pickup in risk appetite, however, might lead to an upside break past the falling trend line and the 89.00 major psychological level. This could spark a longer-term reversal for NZDJPY.

By Kate Curtis from Trader’s Way