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Bullish AUD/JPY on US Dollar Breakdown, Commodity & Chinese Support

Bullish AUD/JPY on US Dollar Breakdown, Commodity & Chinese Support

Tyler Yell, CMT, Currency Strategist

The BIG Idea on Bullish AUD/JPY:

JPY weakness could become widespread as global risk sentiment looks to be on the upswing. On Friday, the Hong Kong Dollar saw the largest jump in 15 years while other Emerging Market Currencies and some commodities saw their best week since February. Given the technical confluence on the charts and the potential for an Ichimoku breakout on AUD/JPY, trades may want to brace for a bullish follow through after a breakdown of 81.50 failed to accelerate lower.

Point to Establish Long Exposure: Break & close above the end of ‘b’ triangle: 83.40

Spot: 81.96 JPY per AUD

Target 1: 85.86 JPY per AUD (61.8% retracement of 2017/2018 range,) 1:1 Risk: Reward Ratio

Target 2: 90.30 JPY per AUD (High of 2017 Range,)1:3 Risk: Reward Ratio

Invalidation Level: 81 JPY per AUD (September 11 high,) 240 pip stop

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The BIG Picture on Bullish AUD/JPY on Break of 83.40:

Please add a description for the image.

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

What Are the Charts Saying?

Bullish divergence tends to burn those that ignore its development. While divergence (when momentum doesn’t match price to new extremes) doesn’t guarantee successful trades, it often precedes strong moves against the predominant trend. In the cast of AUD/JPY, the predominant trend since late 2017 was lower with a few sideways moves, which recently ended with multiple instances of bullish MACD divergence.

The numbers and letters on the charts align with Elliott Wave Analysis. Elliott Wave theory is a way to look at trends and counter-trend moves in financial markets. The theory is nearly 80 years old and first gained widespread popularity when the founder called the market bottom in 1935 based on his recognition of common charting patterns that preceded price reversals.

To many, the problem with the theory is that its utility is often determined on a case-by-case basis, and the labeler or utilizer of the theory may not agree with other practitioners. You learn more about Elliott Wave from DailyFX here.

The chart above may be indicating that a multi-month counter-trend move has finished, and the next few months could see bullish impulses that take the trade to both proposed targets.

Piecing Together the Developments That Could Support This Trade

A sharp move higher in AUD/JPY has happened alongside a confluence of bullish developments that deserve attention for global FX traders. Despite the multiple events, one stands head and shoulders above the rest, and that is the weakening US Dollar as the Fed pushes forward with forecasted hikes.

Other developments alongside the US Dollar weakening is the following:

  • The Bloomberg commodity index (BCOM) looks to have broken above a falling trendline (see chart)
  • Japanese Government Bond yields have pushed higher on dual components of Abe securing the LDP nomination, and JP CPI beating expectations
  • The Hong Kong Dollar saw its largest gain in 15 years on coordinated PBoC / HKMA action
  • Bullish momentum on USD/CNY has stalled and may reverse lower as 1yr forwards continue to discourage new short positions
  • Emerging Market currencies have tied together their first consecutive up weeks since January
  • Australian sovereign debt was upgraded to AAA neutral from AAA negative watch by S&P

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Making Sense of the Supportive Factors on AUD/JPY

No trade is guaranteed. There are only probabilities. As a trader, I like to look at a confluence of themes shifting that aligns with the emergence of bullish developments if the themes are positive or bearish developments if the themes are negative.

The developments above have led to JPY weakness nearly everywhere, which is helpful for the trade. The driver of whether or not this trade succeeds will likely be Australia and the end of the ‘America First’ trade that dominated markets over the summer.

The rally in commodities alongside EM in addition to higher yields would be a recipe that fits the bill for this trade working and capital flowing back into non-US risk assets, which tends to benefit the AUD/JPY cross.

Correlation Insight – A Jump in Commodities May Lead AUD/JPY Higher

This week saw the largest return in the Bloomberg Commodity Index since April, and at the same time caused a break above the falling trendline in the commodity index. While the Index is tilted toward Gold, which did not do much this week, the index still broke out and should be watched by global FX traders.

A sustained breakout could lift AUD/JPY as a signal that sentiment is turning more bullish globally, and further evidence that the ‘America first’ trade is being replaced by the re-emergence of EM and commodities.

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Data source: Bloomberg, Chart created by Jake Schoenleb

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re watching.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---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 trading educational resources. Read more of Tyler’s Technical reports via his bio page.

Talk markets on twitter @ForexYell

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