AUD/JPY continues stratospheric run, hits four year highs above 88.00 but now looking overbought

AUD/JPY’s stratospheric rise showed no sign of easing on the final trading of the week, with the pair surging a further near 1.0% to hit its highest level since the beginning of 2018 around 88.30. That marks a fourth successive day of gains during which time the pair has rallied more than 4.0% from underneath 85.00 and easily taken out 2021 highs in the low 86.00s.

Risk appetite was firmly on the front foot again on Friday, with global equities rallying, as has broadly been the case since Tuesday, lifting risk-sensitive yen crosses like AUD/JPY. But other important factors are also working in the AUD/JPY bull’s favour. Friday saw the BoJ release its latest monetary policy decision, with the bank sticking as expected to its ultra-dovish stance, thus maintaining its status as the most dovish G10 central bank alongside the SNB.

In a week where there was a lot of focus on central banks with the Fed and BoE also deciding on rates (and both lifting them 25bps), the BoJ’s dovish stance hurt the yen across the board. Separately, AUD continues to perform very well, as do other commodity-sensitive G10 currencies as traders and investors re-position themselves towards the currencies of nations that will benefit from recent geopolitics induced rallies in commodity prices.

Whilst most energy and other Russia-sensitive commodity prices continue to trade well above pro-Russia's invasion of Ukraine levels, many (like crude oil) have pulled back from last week’s highs and stabilised at slightly lower levels. AUD’s outperformance this week has confused some analysts, but others pointed out that Australia (and the likes of New Zealand and Canada) stand to benefit not just from higher general commodity prices, but also as major commodity buyers turn away from Russia and look to other major resource-producing economies for supply.

Looking ahead, some technicians might be getting concerned that the recent rally has become overstretched. Indeed, AUD/JPY’s 14-Day Relative Strength Index is blinking over-bought, having hit 78 on Friday, well above the 70 level most define as being in over-bought territory, and at its highest since October last year. If a pullback is in order, the bulls will be eyeing a retest of support in the 86.00 area to reload longs for a longer-lasting push higher.