The U.S. dollar shot higher after the Federal Reserve touted the improvements in the economy and upgraded their inflation outlook. This move helped the greenback erase some of its earlier gains but by the end of the NY session, the dollar faded from its highs. While it could continue to rise, we think USD/JPY gains will be limited compared to NZD/USD’s losses. NZD jumped as much as 1% on comments from Finance Minister Robertson who said nothing more than underlying economic indicators are “good.” The strength of the New Zealand dollar will catch up to the economy as it has and should continue to drive inflation lower. Exports rose strongly in December but are expected to suffer greatly in January on the back of currency strength. It is also far too soon to pick a bottom in the USD. Although we could see another 50 to 100 pip rally in the greenback versus ALL other major currencies, the selling pressure is still very strong. The global growth story, U.S. fiscal finances, selling of U.S. Treasuries and a gradual exit of easy monetary policy abroad are all reasons why the dollar could remain weak. The bottom line is that even if USDJPY extends its gains, we think NZDUSD will fall further, causing downward pressure on NZD/JPY.

Technically, the 4 hour chart for NZD/JPY is very bearish. The strong reversal candle earlier today suggests a correction that could take the pair as low as 80.00.