AUD/JPY: risk-off in play and here to stay - looking for breakout below Bollinger band support

AUD/JPY and copper prices have been a real eye-opener on Thursday. Both are barometers of investor risk appetite, and copper more so a gauge of global economic growth.
We are potentially heading into correction territory in Global Equities, and the divergence between China and the US is compelling - while EMs contagion sentiment looks to be filtering its way through across the spectrum of asset classes.

Ross J Burland FXStreet

AUD/JPY is currently making a case for a break out while USD/JPY bulls capitulate on the 111 handle. AUD/JPY has dropped to a low of 79.61 from a high of 80.29 and is testing the lower BB across all time frames at the lowest levels since Nov 2016. AUD/USD is also fragile although it has been able to recover on dollar weakness this week where EUR/USD flows have seen to a drop in the DXY and to below the 95 handle. However, Trump's now steering towards imposing additional tariffs on Chinse imports and that is not going to be good news for the Aussie as a proxy to what goes down in China town.

Such shots fired would encourage return fire from Beijing to in another round of tit-for-tat tariffs having already declared its readiness to retaliate if Washington imposed a fresh set of duties on $200bn (£155bn) of Chinese goods - (The proposed new tariffs from Washington, levied at 25% of the value of thousands of specific products, would come on top of existing 25% tariffs on $50bn of Chinese exports, most of which kicked in on 6 July).

Watching 95.70 in the DXY

We have seen the DXY appreciate due to trade wars and recover from Trump's jawboning and Powell's dovish delivery at the Jackson Hole. A rally in the DXY back to 95.70 would put pressure on the Aussie but we will have to wait and see how the yen will react this time around. The yen had passed over some of its safe have status to the dollar but is currently taking some of that back as risk appetite and global equities start to sour, where, perhaps, investors are being less complacent to the number of headwinds in the emerging markets and implications of a long drawn out rade war with China - then one needs to look at what kind of economic impact this will take on Japan - (such allies as Japan, South Korean and Taiwan supply the bulk of components and raw materials used in the exports targeted by the Trump administration).

Trump targetting 'Made in China 2025'

However, what investors need to understand is that Trump is targetting industries related to China’s Made In 2025 plan - (a national economic strategy to dominate the high-technology industries of the future of which the Trump administration believes that Chinese theft of intellectual property is intended to advance their 2025 plan - the U.S. is seeking structural changes in China’s economy and therefore, this is probably not something that is going to go away overnight and which could escalate into unforeseen risks in the medium term - remaining dollar positive and negative for markets.

AUD/JPY levels

AUD/JPY is testing the barriers of the BBs on the downside across near and longer-term time frames and closing in on oversold territories in the RSI. There is still room to go in other words. 79.51/60 is first key downside target. 79.10 and then 78.70 come next. The 21-D SMA at 80.80 on the upside would be bulls target to relieve some pressure in the broad bear trend.

Author

Ross J Burland

FXStreet

Ross J Burland, born in England, UK, is a sportsman at heart. He played Rugby and Judo for his county, Kent and the South East of England Rugby team.

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