Bearish AUDJPY on Confluence of High Volatility And Patient RBA

The BIG Idea:

JPY strength is becoming a theme that has spread across the G8 and has already seen runaway moves is pairs like GBPJPY & CHFJPY. Additionally, downbeat expectations on the RBA have the market looking to sell AUD on default on negative global macro developments as global economic surprises via the Citi Economic Surprise Index is near a 2-year low.

Point to Establish Short Exposure: Pull-back to 82

Spot: 81.20 JPY per AUD

Target 1: 79.2 JPY per AUD (61.8% Fibo of 2016-2017 Range)

Target 2: 76.3 JPY per AUD (78.6% Fibo of 2016-2017 Range)

Invalidation Level: 84.1 JPY per AUD (April High)

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The BIG Picture:

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Traders are continually challenged with the question, am I too late on this trade? Alas, that answer can only be answered in hindsight. However, I’ve found it helpful in my trading to see if I’m trading in the direction of the trend that aligns with prominent and growing themes.

Despite AUD/JPY already beaten down, and thus, I prefer to enter on a pullback toward 82.00/50 there remains themes helping traders to see that bearishness prevails.

One way I like to see if the theme is in play is via the options market, and specifically, Risk Reversal. The 1M AUDJPY Risk Reversals show a growing premium paid for out of the money AUD/JPY puts relative to calls, which aligns with the bias that backs this trade idea:

Increasing Premium Being Paid To Protect Against AUD/JPY Downside Over 1-Month

Data source: Bloomberg

When looking to Australian Fundamentals there has been persistent and downbeat expectations on the RBA lifting the cash rate off the 1.5% floor. A recent comment from the RBA that likely brings further caution to AUD bulls is the stalling in the rally in the terms of trade and sliding regional currencies that may well set the stage for AUD underperformance.

Assessing the Damage on the hourly Ichimoku Chart:

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

When looking to the Australian Dollar to Japanese Yen chart the price has continued to fall in a well-defined channel. Such a channel provides a nice set-up to sell on pull-backs in anticipation of trend continuation. The invalidation point on the trade sits at the April high at 84.

A key focus for many participants of late has been the rise in global funding costs which were blamed in part for the horrific few weeks in the rear view mirror for emerging markets, namely Argentina and Mexico. Additionally, with trade talks and nuclear deals ongoing, there remains the potential for both currencies to move on a news shock. Lastly, markets have become decidedly more volatile, which tend to be an environment where JPY weakness doesn’t last long.

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Momentum Scorecard for G10+ Crosses Shows JPY Bullish Tilt

Chart created by Tyler Yell, CMT

The key takeaway on the Macro Score is pervasive Euro weakness and JPY strength. JPY strength is shown naturally against the EUR as well as AUD, NZD, & even the recently strong Canadian Dollar.

Read more about the Canadian Dollar here: Canadian Dollar Rate Forecast: Light Pricing of BoC Hike Gives Upside

IG Client Sentiment Highlight: Australian Dollar Set to Fall on Bullish Retail Bias

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUDJPY-bearish contrarian trading bias.

TO READ MORE:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer a excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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Written by Tyler Yell, CMT