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Australian Dollar Forecast: AUD/JPY to Aim Higher with Risk Assets

Australian Dollar Forecast: AUD/JPY to Aim Higher with Risk Assets

Rich Dvorak, Analyst

AUD/JPY PRICE OUTLOOK: AUSTRALIAN DOLLAR TO STRENGTHEN VERSUS YEN AMID UPBEAT MARKET SENTIMENT

  • AUD/JPY has edged lower over recent trading sessions in contrast to other risk assets
  • AUD/JPY price action tends to hold a strong positive correlation with S&P 500, Bitcoin
  • Australian Dollar could recoil higher against the Yen if market sentiment stays strong

The Australian Dollar has faced headwinds over recent trading sessions. AUD/JPY price action, for example, has already weakened 100-pips so far this month. Australian Dollar selling pressure versus the Yen interestingly comes in spite of broadly upbeat market sentiment and falling volatility. This has created a disconnect from the strong direct relationship AUD/JPY price action generally maintains with other risk assets, such as the S&P 500 and Bitcoin, which are both trading near their respective record highs

Correspondingly, there could be potential for the Aussie-Yen to regain its footing and claw back recent downside while other speculative assets like major stock indices and cryptos continue to enjoy strong bids. The Australian Dollar might find support from positive currency carry trade flows if volatility stays suppressed as well. AUD/JPY could also rebound higher in response to potentially better-than-expected economic data releases on Australian jobs and China GDP due later this week.

AUD/JPY PRICE CHART WITH S&P 500 INDEX OVERLAID: DAILY TIME FRAME (25 FEB 2020 TO 12 APR 2021)

AUDJPY Price Chart with S&P 500 Overlaid Australian Dollar Forecast

Chart by @RichDvorakFX created using TradingView

AUD/JPY price action historically moves in lockstep with the S&P 500 as illustrated on the chart above. Although, we can see that the 20-day correlation between AUD/JPY and the S&P 500 has recently broken down and is now on the brink of turning negative. With the S&P 500-derived VIX Index, or fear-gauge, hovering around pandemic lows and stocks hitting all-time highs, Australian Dollar bulls might consider viewing this development as an opportunity to add some exposure to a potentially undervalued AUD/JPY. An influx of Australian Dollar buying pressure could restore the correlation between AUD/JPY and the S&P 500 to its typically strong positive relationship. Conversely, a deterioration in market sentiment might see the S&P 500 snap lower and AUD/JPY extend its slide.

AUD/JPY PRICE CHART WITH BITCOIN OVERLAID: DAILY TIME FRAME (12 JUN 2020 TO APR 12 2021)

AUDJPY Price Chart with Bitcoin Overlaid Australian Dollar Forecast

Chart by @RichDvorakFX created using TradingView

Likewise, AUD/JPY and Bitcoin often move in the same direction with one another. Though the 20-day correlation between AUD/JPY and Bitcoin may not be as strong as it generally is between AUD/JPY and the S&P 500, both relationships tend to be broadly positive. That said, with Bitcoin looking primed for another breakout higher, there could be potential for the Australian Dollar to follow suit. AUD/JPY bulls might look for fresh year-to-date highs if this scenario materializes. On the other hand, continued demand for safe-haven currencies like the Japanese Yen could keep AUD/JPY under pressure and perhaps see Bitcoin lose altitude too.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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