AUD/JPY’s Rally Facing Range Resistance

How stable is the AUD/JPY Range? • Levels to Watch: -Range Top:       85.00 (Range, Pivot) -Range Bottom: 76.50 (Fibo, Range, Pivot) • Despite a broader flight to safety on the back of a downgrade to Portugal’s credit rating and its implication for the Euro-Zone, the yen has come under pressure. Typically the Asian currency benefits from risk aversion, especially against the high yielding Aussie. The pair is a thermometer for the carry trade and broader risk sentiment. Its current strength is either a product of anti-yen sentiment or that risk appetite may continue. • Support at 76.50 appears to the most reliable bound of the current range as it has held since July, 2009. There isn’t the same level of confidence on the upper bound, as we have seen reversals come at tests of 84, 85 and 86. Suggested Strategy • Short: Place an entry at 84.75-above the upper bound and above the 11-12 high of 84.23 • Stop: Set the stop to 85.75-100 pips in risk and a break above the 10/23 high • Target: The first target is 82.96-3/23 low and approximately 1.5 times risk

Trading Tip – If Europe’s troubles continue to be a weighing factor on sentiment the AUD/JPY may find it hard to build upon recent gains. The RBA has already hiked rates four times since the country’s recession ended which has placed it as the undisputable high yielder. However, the outlook for additional hikes has dimmed as most of its counterparts are expected to remain on hold until the second half of the year and into 2011. Meanwhile, markets have been waiting for a pullback in risk appetite which hasn’t come leaving additional potential upside for the pair. Traders have started to abandon their bearish biases as improving fundamentals continue to raise the outlook for growth. It is often at these times when we see the expected change in direction and the reversal needed to make our set-up successful. Given the potential for further Aussie appreciation, I would remain nimble with this strategy and for those that are more risk averse a tighter stop is recommended. A market filled with volatility and dominant trends makes any range strategy a risky one, which is why traders may want to wait for a clear sign that a reversal is underway. A break below the rising trend line may be a better opportunity for those with patience.

Event Risk for Australia and Japan

Australia – Diminishing yield expectations have lessened the impact of Australian fundamental data but signs that growth is accelerating will continue to be a supporting factor for the com-dollar. Indeed, the recent improved outlook for global growth has led to markets pricing in another 130 bops in rate hikes over the next twelve months. The Conference Board leading index is a forecast of growth for the next 3-6 months and continued improvement will raise the prospect for further RBA tightening. The most influential release will be the February’s retail sales report, as strong domestic growth will put upward pressure on prices, forcing the central bank to consider another rate increase as they look to head off inflation.

Japan – Japanese fundamentals have very little impact on price action as the BoJ is expected to remain on hold over the next three years. However, the consumer price report bears watching as policy makers main concern is deflation. If prices continue to decelerate then we could see the central bank look to take initiate quantitative easing measures. Minutes from the last policy meeting, showed conflicting outlooks for growth with some members viewing risks balanced and others seeing further downside.