The NZ10Y-JP10Y bond yield spread is surging higher and that should lift the NZD/JPY over the medium term. Here is the rationale for that outlook below.
The New Zealand dollar has significant reasons for strength:
- The headline inflation rate is just under 6% at 5.9%. This means the RBNZ is under pressure to hike rates to control very high inflation.
- Unemployment is low at 3.2%.
- New Zealand bond yields continue to surge higher.
- Interest rate markets are pricing in nearly 8 interest rate hikes from the RBNZ this year. The current level is at 1.00%.
- The RBNZ has projected the terminal interest rate to be above 3.3% by March 2025.
- The Japanese Yen has significant reasons for weakness.
- High oil prices weaken the Yen as it is a net importer of energy.
- The BoJ has pledged to keep the Japanese 10-year yields within the +0.25% -0.25% band.
- Inflation is still relatively low in Japan with the headline at a paltry 0.5%.
- So, this means the NZD/JPY pair should keep finding dip buyers. See the chart at the top for a potential trade idea.
The main risk
The main risk for this outlook is that the BoJ change its policy mandate. One trigger for that could be if imports become too expensive. This could motivate the Bank of Japan to shift its policy stance and it is a risk that should be monitored by BoJ central bank speakers.
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