AUDJPY: Don't Try to Catch a Falling Knife

It has been an exciting early morning in North America as a variety of new developments have hit the news wires and rankled currency and futures markets. The follow through on the Reserve Bank of New Zealand dovishness from late yesterday continued to resonate through Asia and Europe as the NZD pairs retreated even further than the initial reaction. Not to be left out, the AUD felt the force of the RBNZ’s decision as well as it failed to hold the 0.80 handle and has fallen through 0.78 thus far.  The AUD’s demise isn’t all the fault of the RBNZ though, as my colleague Chris Tevere outlined earlier, rumors about the Reserve Bank of Australia and their potential to cut interest rates are making the rounds as well.

Anyone who has been around trading for any length of time has probably heard the expression, “Don’t try to catch a falling knife.” However, if you aren’t familiar with the concept, it essentially means that when markets are falling precipitously, it is VERY difficult to pick out the point at which they will stop and can often fall much further than you think is rational. At this point, the AUD is a knife that you just dropped and trying to catch it before it reaches its floor could result in cuts to your trading account.

So the quandary then becomes whether we wait for it to find its floor, or go with the flow and ride it down. In the AUD/JPY specifically, a significant rising trend line and a 3-month low have been broken near 93 and 92 respectively, which could signal further decline. The next major level of support lies at the psychologically significant level of 90, nearly 200 pips away from current prices as I go to press. The yearly low is just above 88, so this could get ugly, particularly if Japanese inflation and Household Spending perform well this evening. In any case, the RBA’s decision on interest rates (February 3rd) is more immediate than that of the Bank of Japan (February 17th), so even if there is a small bounce, it may be capped by previous support becoming resistance as investor’s focus becomes more Aussie-centric.