AUD/JPY: Could Improving Risk Sentiment Drive Us to New 11-Month Highs?

The AUD/JPY surged higher in the latter half of march, rising all the way from the mid-March low near 91.00 to peak near 96.50 earlier this month. As we all know, markets never move in a straight line forever, and AUD/JPY bulls are now taking a breather after the big rally. Even though the buyers have collectively taken their feet off the gas, the sellers remain cautious about bucking the bullish trend; as a result, the AUD/JPY has merely consolidated in a tight range between 95.00 and 96.00 for the past two weeks.

This price action, a rapid surge higher followed by a tight consolidation near the top of the range, creates a quintessential bullish flag pattern. If confirmed by a break and close above the top of the flag, the pattern points to a strong bullish continuation. In addition, the AUD/JPY’s recent consolidation has allowed the 20-day moving average to “catch up” with prices after accelerating away from the short-term MA in the latter half of March.

Beyond those indicators, the RSI remains broadly in an uptrend and has pulled back from overbought territory (>70). As long as the pair remains above this trend line, the momentum remains on the bulls’ side. The MACD confirms this view, with both the indicator itself and the signal line well above the key “0” level).

Of course, the bullish flag pattern would only be confirmed by a break above the top of the consolidation zone in the 96.00-50 area. If we do see a move through that ceiling, buyers may look to target longer-term 61.8% Fibonacci retracement at 98.16 next. More aggressive bulls should note that the measured move target of the flag pattern actually projects a target all the way up near 100! Meanwhile, a confirmed break below the 20-day MA would shift the near-term outlook back to neutral.

Readers should also be aware that the AUD/JPY is particularly correlated with the market’s “risk sentiment,” or how optimistic or pessimistic traders feel about the world economy. Therefore, a breakout in other risk sensitive assets (including equities, oil, and other higher-yielding currencies) next week could also add fuel to the AUD/JPY bullish fire.

Source: FOREX.com