AUD/JPY fails to hold above 21DMA, drops over 1.0% into mid-91.00s amid risk-off Wall Street session

A sharp deterioration in risk appetite on Wall Street on the final trading day of the month that saw the S&P 500 index drop around 3.0% to fresh multi-week lows weighed heavily on risk-sensitive currencies on Friday. As a result, the Australian dollar was one of the underperforming G10 currencies on the day, while the safe-haven yen was able to attract some safe-haven-related inflows.

AUD/JPY was subsequently last trading lower by more than 1.0% in the 91.75 region, having failed for a second successive session to rally above its 21-Day Moving Average near 93.00. Friday’s pullback puts the pair on course to have fallen about 1.5% this week, which is not too shabby considering the pair was at one point trading nearly 3.0% lows in the mid-90.00s. The dovish tone of the BoJ on Thursday, which triggered a broad drop in the yen at the time, combined with spicey Australian Consumer Price Inflation data on Wednesday, which triggered a build up of RBA tightening bets, was the main catalyst for the mid-week rebound.

Markets now expect that the RBA will hike interest rates by 15 bps next week to 0.25%, with the bank expected to fully depart from its prior stance emphasising “patience” to being more proactive in getting rates back to neutral. Against that backdrop, one might think that risks are tilted to the upside for AUD/JPY next week. But if the pair is to have any chance of rallying back towards recent multi-year highs in the upper 95.00s, risk appetite in equity markets is going to need to improve.

But with the Fed expected to hike interest rates by 50 bps, announce QT plans and signal its intent to get rates back to around 2.5% by the year’s end, betting on a risk appetite rebound against this hawkish backdrop is risky. Moreover, the Aussie also has to contend with risks related to lockdowns in China, which could yet further throttle demand in Australia’s most important export partner.