NZD JPY

Risk assets have enjoyed a strong fortnight following Japan’s market meltdown, recovering much of the ground lost during those wild days earlier in the month. But there are some signs of caution creeping in ahead of Jerome Powell’s speech at the Jackson Hole economic symposium on Friday.

New Zealand’s jobs report beat across the board in the June quarter with unemployment undershooting forecasts while wages growth, employment, participation and wages growth topped expectations. However, the details were not as impressive, keeping the prospect of an August rate cut from the Reserve Bank of New Zealand in play.

Soft US inflation and stability in the Fed interest rate outlook point to an ideal environment for renewed upside in Japanese yen FX crosses, assuming prevailing conditions don't shift meaningfully. GBP/JPY and NZD/JPY are two pairs on the radar.

The RBNZ is highly likely to leave its overnight cash rate at 5.5% on Wednesday. However, with updated economic forecasts, along with a press conference from Governor Adrian Orr, the bank has been given plenty of clear air to shake these sleepy FX markets up, if it chooses to do so.

The Kiwi dollar is pushing higher, potentially reflecting no escalation in dovish rhetoric from the RBNZ despite New Zealand sitting in a double-dip recession. It has an inflation mandate and inflation remains too high to justify lowering rates yet.

Almost by stealth, the unloved and under pressure Aussie and Kiwi are not far off hitting decade highs against the yen. With the near-term price action in AUD/JPY and NZD/JPY pointing to upside, and with momentum indicators sending the same message, the risk of a topside break appears to be growing.

Unless we see a big upside surprise in Thursday's PCE inflation report it may be difficult for US bond yields to continue pushing higher, limiting the fuel that helped propel the US dollar higher over the past two months.

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AUD/JPY and NZD/JPY formed bullish engulfing candles today, trading to their highest levels since 2015.

With sentiment slowly turning lower ahead of inflation and Jackson Hole Symposium, JPY pairs could face pressure as they yen attracts safe-haven flows.

Asian markets and commodity FX led the way lower overnight as traders continued fret over the potential for a global recession.