- AUD/JPY suffering as markets fixate on COVID-19 uncertainties.
- Japan's bloated public debt could be a spanner in the works for the bulls.
- Its a toss-up between the USD and yen at this juncture.
AUD/JPY is trading at 65.06 and is down 1.36% on the day having travelled from a high of 66.35 to a low of 64.86. Thre are questions being asked over both the USD's and yen's safe-haven qualities which could have a major implications for AUD/JPY, depending on the conclusion of the market over coming weeks.
AUD/JPY is deemed as the markets go-to reference for the market's risk profile in the FX space – bullish when risk-on, bearish when risk-off. There has been a surge in the price of the cross since the end of last month, rallying from a low of 59.80 to a high of 67.70 before the pair flopped back to current levels in the 65 handle. The initial panic has calmed a little, so we have moved into an 'anxiety' zone, rather than 'panic' which is the likely catalyst for the risk in the cross as its settles around a 38.2% Fibonacci retracement level having fallen just shy of a full 50% mean reversion of the panic sell-off.
The US dollar has been a two-sided coin, with a dash for cash and a liquidity squeeze sending it to monthly highs while at the same time, picking up a safe haven bid. Then came along the Federal Reserve;' bazookas and a collaboration of central banks working together to ensure USD liquidity in the swap lines. This sent the dollar off its perch and helped the yen to reemerge as the FX spaces preferred go-to place for safety, along with the CHF.
Now, it is a question of whether the yen can continue with its advance considering the fact that Japan carries a huge, bloated public debt. "Now that the coronavirus crisis is leading to an unravelling of fiscal discipline, questions are being asked in Japan as to whether this could finally be the trigger that undermines the value of the JPY," analysts at Rabobank argued.
Bullish scenario fo JPY
Its a toss-up between the dollar and the commodity complex at this stage with regards to the amount of stimulus the Federal Reserve is likely to do. If the Fed is poised to add trillions to its balance sheet, his completely undermines the carry status of the USD. Should there be, for instance, a doubling of the Fed's balance sheet, then the yen could be seen as a more favourable place of FX-sanctuary and adding additional downside pressures for the cross.
AU/JPY levels
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