AUD/JPY bulls staying with the course and eye higher highs in the strong bull cycle

At 95.89, AUD/JPY is strong and rising over 1% on the day following a surprise move and hawkishness from the Reserve Bank of Australia. AUD/JPY rallied to a high of 96.14 on the back of the RBA's rate hike and the statement that says explicitly that, “the Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.” The stronger language that had been set out in May suggests at least another 50bp increase is on the cards over the next few months, analysts at ANZ Bank argued. 

By contrast, the weakening trend in the yen has reasserted itself while the monetary policy divergences will continue to widen and that should lead to continued yen weakness, as analysts at Brown Brothers Harriman pointed out. ''Governor Kuroda walked back his comments yesterday regarding greater tolerance on the part of consumers to accept higher prices, noting 'I didn’t necessarily say it in an appropriate way.' Officials have the tricky task of explaining exactly why exiting years of deflation should be welcome.  April leading and coincident indexes were also reported.''

As a consequence USD/JPY is trading at a new high for this cycle near 133 which has helped to elevate the Aussie/yen cross further.  ''We maintain our long-standing target of the January 2002 high near 135.15,'' the analysts argued. 

Meanwhile,  historically,  the yen's correlation to stock markets has been negative as it tends to benefit from risk-off tones, but since April of this year, that correlation to the S&P 500 has broken down as follows and instead, the DXY is picking up the slack:

The indicator at the top is a trend bias indicator based on the strength of the US dollar. In this scenario, it is indicated that the S&P 500 is destined to move lower. Meanwhile, the JXY index that measures the yen vs. a basket of currencies is moving lower, despite this while the greenback's trend is bullish. Whether this is a paradigm shift or just a brief irregularity will be important for the direction of AUD/JPY, as historically, the pair has been regarded as the forex risk barometer.

If the yen continues to decouple from risk, then the AUD/JPY cross will more likely depend on the RBA and central bank divergences. The Bank of Japan is committed to conducting fixed-rate operations, which will be expected to keep this sharp Japanese yen depreciation going for the time to come which could expose a much higher level in AUD/JPY. After all, the BoJ’s efforts to anchor the yield target around 0% is more important to it than the cost of living and the central bank has made it clear that it firmly believes that higher yields would impose bigger costs on the economy more than FX depreciation. 

 AUD/JPY technical analysis

The price is running into resistance but following a restest of prior highs that could be expected to act as support, should the bulls commit, then the monthly highs near 102.80 will be eyed.