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AUD/JPY Price Forecast: Bearish Engulfing Pauses Bullish Advance

AUD/JPY Price Forecast: Bearish Engulfing Pauses Bullish Advance

Richard Snow, Analyst

AUD/JPY Analysis:

  • Premature optimism around the global vaccine roll-out could slow AUD/JPY advance
  • Risk events: AUD unemployment data, BoJ rate decision
  • IG Client Sentiment shows 60% of traders are short - suggests bullish continuation

Expectations Around Rate of Global Recovery May Slow AUD/JPY Advance

The Australian Dollar, along with its Australasian counterpart the New Zealand Dollar, has benefitted form the anticipated roll-out of the covid-19 vaccines and the anticipated economic recovery that is expected to follow suit.

After the initial outbreak, China, Australia and New Zealand have managed to drastically decrease the number of new infections which many view as a positive sign for their respective economic recoveries.

Today China released better than expected GDP figures for Q4 2020 which is likely to have a positive knock-on effect for Australia due to their interrelationship, often referred to as the ‘core-perimeter model’.

China GDP

However, the positive GDP data did little to stem the recent dip in AUD/JPY which calls into question whether the rest of the world is likely to experience an economic recovery like what is expected China and, by extension, Australia and New Zealand. Despite vaccines going ahead, there are a number of challenges that could impact the rate at which they can be deployed, such as cold storage, supply and efficient implementation.

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Risk Events on the Horizon

Thursday is a crucial day for the pair as Australian unemployment data is released along with the Bank of Japan’s (BoJ) interest rate decision.

AUD and JPY economic calendar

For all market-moving data releases and events see the DailyFX Economic Calendar

Key Technical Levels

Towards the end of 2020 and beginning of 2021 the Australian dollar was viewed as a benchmark for improving economic conditions and was often mentioned in headlines alongside the words ‘risk-on’.

The weekly chart below shows why this was the case as the AUD/JPY currency pair reveals what appears to be an inverse head and shoulders (long- term bullish reversal) pattern.

Weekly AUD/JPY Chart Highlighting Bullish Run

AUD/JPY weekly chart

Chart prepared by Richard Snow, IG

Looking at more recent price action, the possibility that AUD/JPY established a top is supported by the bearish engulfing that has lead to subsequent lower prices. The red circle highlights the area of confluence (intersection of the neckline from the H&S pattern with the ascending trendline) which may determine future price movement. A break and close below this area would highlight the nearest zone of support around 78.50. Continued selling would then bring the 77.00 level into focus as the next level of support.

Should AUD/JPY bounce off the area of confluence, bulls may push the pair back towards the recent high at around 80.90.

AUD/JPY Daily Chart

AUD/JPY Daily Chart

Chart prepared by Richard Snow, IG

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Potential Bullish Continuation (Using IGCS Contrarian Approach)

AUD/JPY Sentiment
  • AUD/JPY: Retail trader data shows 36.23% of traders are net-long with the ratio of traders short to long at 1.76 to 1.
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.
  • The number of traders net-long is 12.08% higher than yesterday and 11.64% lower from last week, while the number of traders net-short is 21.49% higher than yesterday and 3.16% higher from last week.
  • Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/JPY-bullish contrarian trading bias.
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--- Written by Richard Snow for

Contact and follow Richard on Twitter: @RichardSnowFX

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