AUD/JPY: Bulls above 38.2% Fibo chasing rin-on vibe vs deeper-rooted level of market anxiety

•  AUD/JPY is rising as the dollar keeps falling and commodities take off.
• USD/JPY dropped below key trendline support marked from the 31st Jan lows at 110.70, with traders looking to short on confirmation of a price build up below the level on a closing basis. 
• AUD/USD making fresh highs in pursuit of the 0.72 handle. 

Risk-on sentiment has driven commodity prices higher, notably in 'Dr. Copper' that is trying to write-up a clean bill of health of the global economy. However, one might beg to differ and wish to warn the bulls not to be too hasty to buy into the price action just yet.

Copper, according to IHS Markit, saw a rampant decline in output in January and coupled with a weaker greenback, trade talk hopes and Central Banks shifting gears, all making for the risk-on environment, the rush to yield and risk might be a little premature.

When looking to the gold price and US yields, despite US stock indices, such as the NASDAQ up over 12% since the turn of the year, it proves that there are uncertainties, and with the S&P at the top of a potential 5-wave resistance, all could come crashing down again at the blink of an eye. This is where, AUD/JPY, as the market's risk barometer, will come into play again, to the downside, as it struggles to convince through the 38.2% fino of the 2018 decline. 

When looking to the yen positioning in the market, the pace of adjustment has accelerated over the past few weeks with a liquidation of gross shorts which also implies deep-rooted concerns over the health of the global economy. However, the dollar is noted to be running about 1% rich to relative rates and equities, which should keep USD/JPY rallies capped around 111. 

"Currently the Bloomberg market consensus points to USD/JPY ending the year lower at 108. This is a little higher than our view that there is scope for a move towards 105. Due to its status as a safe haven currency, the JPY will often be driven more by international than domestic factors.  Even though the BoJ continues to signal a strong commitment to its huge QQE stimulus programme, we would expect the JPY to strengthen on a drop in risk appetite in the market," analysts at Rabobank explained. 

Central bank liquidity vs level of market anxiety

"Against a backdrop of slowing global growth we would expect investors to become increasingly nervous of risky assets such as Emerging Market currencies this year and to retrench into safe havens.  Since the USD has some safe haven value, this is likely to mean that the USD will remain well supported against a wide basket of currencies but that it is likely to be outperformed by the JPY.  That said, there is risk that this logic could be thrown off course if access to central bank liquidity dulls the level of market anxiety,"

analysts at Rabobank argued. 

Key risk events ahead

Today's FOMC minutes event will be one to watch ahead of the Aussie jobs. Aussie jobs is on the cards tonight and will be the last string of data events that we will have for the Aussie for some time, all of which have not been favourable to the bid so far, but somehow, the Aussie has remained robust, taking its cues from a softer dollar, dovish Fed sentiment and stronger commodity prices instead. 

Analysts at TD Securities explained that January is seasonally a weak month for employment as seasonal jobs are no longer required,(but this is adequately captured by the seasonal adjustment process):

"We look for +20k jobs for January, and with an unchanged participation rate of 65.6% leaves the unemployment rate at 5.0% (mkt +15k and +5.0%). An average monthly addition of +20k/m leaves the unemployment rate steady at 5%, which is the RBA’s expectation. The Bank's downside risks will be exacerbated if the unemployment rate starts to creep towards 6% again".

FOMC minutes could be pivotal

"Today's FOMC minutes could well be pivotal and anything less than a dovish bias would be a disappointment to the markets and risk sentiment which could ultimately damage the Aussie if it all comes crashing down. Such an outcome would potentially give the greenback a much-needed lifeline at this juncture as the trend keeps heading lower. On the other hand, if the Fed minutes are dovish, (i.e. a mention of QT being brought forward), and more so than the neutral tones we have got from the likes of Mester and Williams this week, then stocks will surely rally, the dollar will fall and hopes of a trade deal will seal the deal for commodity prices, supporting the Aussie along in its northerly corrective trajectory. However, considering the run of poor data and dovish sentiment in the RBA, today's jobs data will be critical and any spikes will likely be shortlived leading into the event,"

as previously written here. 

AUD/JPY levels

AUD/JPY is creeping over the 38.2% line but bullish efforts will come undone if the yen manages to break below the said trend line support in a meaningful run to the upside vs the greenback. The DXY is also treading on thin ice, declining in a technical trend below trend line resistance, embarking on trend line support and extending losses below the H&S neckline, supporting the Aussie and commodities. AUD/JPY needs to get above the 100-D SMA en route to the 80 handle and then a run to the 200-D SMA and the 50% fino is feasible located at 80.84/91 respectively. A move to the downside would open the doors to 77.43 as the near term daily trend lows.