AUDJPY's stellar run reaches a critical juncture

It has been an incredible month for AUDJPY with the pair gaining around 900 pips. This has sent AUDJPY from the bottom of its long-term trading channel to the top of it, underpinned by widespread yen weakness and a mild recovery in the aussie.

Traders have been flocking away from the yen in response to game changing policy meetings at the Fed and the BoJ which have altered the fragile dynamics of USDJPY and the entire FX market. The divergence of monetary policy objectives between the two major central banks is expected to continue to dictate the movements of the dollar and the yen. Admittedly, this takes into account everything from overall global macro conditions to the micro climates present in individual economies.

The BoJ

The BoJ’s decision on October 31 to massively boost its quantitative easing efforts has pushed the yen around 5% lower against the US dollar. The decision by the central bank to ramp up its efforts to spur inflation and growth came sooner than the market expected, largely because Kuroda and his cohorts at the BoJ had been saying everything was peachy in the months leading up to the meeting, thus the sell-off in the yen was swift, brutal and volatile.

AUD regains some composure

Meanwhile, the Australian dollar has been broadly moving at the whim of the US dollar, although it has been benefiting from increased carry and looser policy in China (eyes on Chinese economic data which is due out at 1630AEST today). In the last week or so, key commodity prices for Australia have broadly stopped falling which has eased selling pressure on the commodity currency. Yield seekers have also been encouraged by broadly better than expected Australian economic indicators this month.

The question is, can this trend remain? The underlying fundamentals moving AUDJPY may continue to lead the pair higher in the long-term. The overwhelming forces of the carry trade and imbedded weakness in Japan’s economy are very dominant themes in the long-run. In saying that, this is going to be weighed against a fairly uncertain, yet still bleak, outlook from the Australian economy.

The technical outlook

The technical signals coming from AUDJPY are mixed, especially over different time frames. Bullish technical indicators in the long-term are being weighed against some bearish indicators in the short-run. The most recent run higher in the pair was preceded by the formation of a strong bullish harami candlestick pattern, and the techs are still looking to push the pair higher. However, AUDJPY is starting to look overbought and a rejection around the top of its long-term trading channel may precede a period of consolidation in price.

Source: FOREX.com