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Bullish AUD/JPY on Positive Nikkei Correlation As Commodity Bloc May Rebound

Bullish AUD/JPY on Positive Nikkei Correlation As Commodity Bloc May Rebound

Tyler Yell, CMT, Currency Strategist

Point to Establish Long Exposure: Daily close > Ichimoku Cloud @ 85.00

Spot: 83.50

Target 1: 88.10 (2017 high)

Target 2: Open (No Target) with trailing stop at last week's low

Invalidation Level:83.50 (May 5, 2017 low)

Would you like to see what our Analysts Forecast for JPY longer-term? Find out here!

Explaining the trade idea:

In my FX closing bell webinars,I have encouraged traders to focus on the weak currencies and to track the themes that are driving the weak currencies. Today’s analyst pick tracks two weak currencies with an eye for one to reverse the current weakness and the other to maintain its weakness. The pair is AUD/JPY, and the reasons for their individual weaknesses will be addressed so we can monitor any shift that could lead to a potentially great trade opportunity.

First, AUD sold-off rather aggressively at the start of May as the highly correlated Iron Ore, Dalian Iron Ore to be specific went limit down (fancy futures talk for the most an exchange will allow a commodity to fall to prevent margin mismatches) on Thursday. We also saw steel and copper plummet this week on worries that manufacturing is slowing down and there will no longer be the implied demand that once supported the market. What is surprising is the week began with the Reserve Bank of Australia providing a confident tone and looking through slower house price growth while keeping rates at 1.5%. Against other currencies, the AUD has fallen aggressively this week, but the weaker JPY has AUD/JPY higher on the week. The weakness across the board can be understood, as iron-ore is the country’s largest export commodity.

Second, the Japanese Yen is weak, as it appears to ride the risk-on wave that is clearly seenin THE global equity markets pushing higher. In the global equity space, the Nikkei is a laggard and could play catch up to the DAX and Nasdaq, which are trading at all-time highs this week. There is a rolling 20-day correlation coefficient of +.8371 to AUD/JPY and Nikkei 225. Therefore, if Japan’s famous equity index does play catch-up, we could see JPY weakness continue.

Putting these themes together, there does not appear to be enough evidence in the trade to trigger an entry confidently. Instead, I’ll be placing an entry order to buy on a break above 85.00 with an initial target to unload half the position at 88.10,the 2017high and let the rest ride while trailing my stop to the prior weekly low if I’m that lucky. The invalidation of the trade, should it get triggered, would be on the May 5 low at 83.50.

Join Tyler in his Daily Closing Bell webinars at 3 pm ET to discuss tradable market developments.

Favorable correlation of rising Nikkei 225 could help AUD/JPY trade higher:

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Created by Tyler Yell, CMT

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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

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