AUD/JPY: Prepping for Fireworks

The week has started off a little slow in worldwide markets as there hasn’t really been any news to get the blood pumping yet, but that all could change in a hurry as we transition to the Asian trading session this evening. Not only is Australia releasing the minutes from their most recent Reserve Bank of Australia meeting, but China will be releasing their all-important GDP report as well as a host of other data points including Industrial Production and Retail Sales, among others.

Whenever China releases some important data it typically has wide ranging impact on a variety of economies, chief among them is Australia. Bad data out of China usually depresses the AUD while good data gives it a boost. In addition, bad data out of the Asian giant also could kick off a risk aversion move, which means that the JPY could become a popular currency due to its safe haven status. It is this divergence that may create an opportunity in the AUD/JPY if Chinese GDP doesn’t perform as admirably as expected.

The reason for my skepticism of Chinese data has a lot to do with how the People’s Bank of China has been acting of late. About a month ago the PBoC injected 500 billion yuan into the nation’s five largest banks which may be signaling they are concerned with growth. Then last week, they announced that they would be extending 200 billion yuan in short-term loans to 20 large banks under the guise of spurring lending activity and boosting growth. This was in addition to two cuts to short-term borrowing rates for Chinese banks performed over the last month. Does it appear they are worried about something?

Historically, the PBoC has been relatively proactive with their monetary policy, making changes that could benefit the nation previous to releasing the figures that led to the action to the public. This same type of scenario could be building now with GDP on tap and the PBoC getting aggressive. If this detective work is relevant, we may see a GDP read this evening that is lower than the 7.2% expectation, and the flight to the safety of the JPY and away from the AUD could begin in spades.

On the technical side of the argument, the AUD/JPY has been in an overall downtrend since the beginning of September, and has recently retraced nearly 61.8% of its most recent significant high to low. While it is possible a pre-GDP release rally could take this pair up to the 78.6% Fibonacci retracement near 95.00, the current level could pose as an ideal staging ground for a future fall.