AUDJPY: One to watch

The AUD/JPY is among the most interesting FX pairs to watch this week, for both fundamental and technical reasons. My colleague James Chen, in his USD/JPY article, has already written about the Bank of Japan’s meeting on Thursday and has highlighted, among other things, the ineffectiveness of the BoJ’s easing tools and tactics. In short, the market may be expecting to see a policy change as speculation was rife on Friday that the BOJ may consider offering financial institutions a negative interest rate on some loans.

Whatever happens, Thursday will indeed be a big day for the yen as we will also have some key Japanese data to consider. These include, among other things, CPI, household spending, retail sales, industrial production and unemployment rate. From Australia, the most important data will be the CPI measure of inflation on Wednesday.

The AUD/JPY has historically also been a good barometer for risk appetite. With this being a busy week for earnings, top tier economic data and key central bank meetings, the stock markets could turn volatile, leading to sharp moves in the AUD/JPY.

Technical outlook

It is uncanny how prices usually reach key technical levels ahead of important fundamental events and it is no different for the AUD/JPY which has now arrived at a major resistance zone. As can be seen on the chart, the 86.35-86.70 area had been a key support and resistance range in the past, while just below here is where a long term bearish trend line meets the 200-day moving average (85.90).

The previous occasions when the AUD/JPY tested the bear trend and the 200-day moving average we saw price take a turn in the opposite direction. Will it be the same this time? For the sellers to grow in confidence, the key short term support at around 84.65 will need to break. Even then, the potential losses could be limited to the rising trend line. Nevertheless, there should be plenty of room to take advantage of the potential breakdown.

The bulls however would point to recent price action and argue that the sellers may be losing control. For example, recent attempts to move decisively below prior lows around 82.15 and more interestingly the psychological level of 80.00 have been rejected on a number of occasions. What’s more, the AUD/JPY has now put in a couple of higher lows. All it needs now is a push in order to make a higher high on a daily closing basis. This could happen if the aforementioned 86.35/70 resistance range breaks down.

In a nutshell, the AUD/JPY has arrived at a key technical area ahead of important economic data. Conservative traders may wish to keep this pair in their watch list and see which direction it will take – with the trading idea being to ‘go with the flow.’