Japanese Yen, AUD/JPY, NZD/JPY, Interest Rate Differentials, Risk Aversion – Talking Points:
- Souring risk appetite and tightening interest rate differentials have buoyed the Japanese Yen in recent days.
- AUD/JPY eyeing a push to challenge key support at the 55-EMA.
- NZD/JPY perched precariously above 12-month trend support. Is a downside break on the cards?
The haven-associated Japanese Yen has been under a significant amount of pressure against its major counterparts in recent weeks, as the marked climb in sovereign bond yields put carry trades back in vogue. However, a string of renewed coronavirus restrictions in Europe has called into question the global economy’s recovery from the pandemic and directed capital flows away from risk-associated assets and into JPY.
Moreover, dovish rhetoric from several central banks – such as the ECB, BoE, RBA, and Federal Reserve – has cooled the sell-off in global debt markets and driven yields lower, as policymakers reiterate that they will continue to keep their respective monetary policy settings accommodative for the time being. This has led to the rapid unwinding of AUD/JPY and NZD/JPY long positions, as the spread between Australian and New Zealand government bonds, and JGBs, tightens significantly.
Therefore, a prolonged bout of risk aversion, and an extended move lower in Australian and New Zealand bond yields, will probably lead to further gains for the Japanese Yen. Here are the key levels to watch for AUD/JPY and NZD/JPY rates in the coming week.
Australian and New Zealand 10-year Government Bonds vs JGBs
Chart created using Tradingview
AUD/JPY Daily Chart – Eyeing Mobile Support at 55-EMA
From a technical perspective, further losses look on the cards for AUD/JPY rates, as prices slice below key support at the 38.2% Fibonacci (83.06) and the 34-day exponential moving average (82.92).
With the RSI diving to its lowest levels since November 2020, and the slopes of all three short-term moving averages – 8-, 21-, and 34-period – the path of least resistance seems skewed to the downside.
A daily close below psychological support at 82.50 would probably ignite a downside push to challenge confluent support at the Rectangle consolidation pattern’s base and 55-EMA (82.00). Breaching that likely brings former resistance-turned-support at the January high (80.93) into focus.
However, the successfully neutralization of selling pressure by Rectangle support could lead to the resumption of the primary uptrend extending from the March 2020 nadir.
Ultimately a convincing surge back above the 83.00 mark is needed to carve a path for buyers to drive the exchange rate back towards the yearly high (85.45).
AUD/JPY daily chart created using Tradingview
IG Client Sentiment Report
The IG Client Sentiment Report shows 39.15% of traders are net-long with the ratio of traders short to long at 1.55 to 1. The number of traders net-long is 9.79% lower than yesterday and 12.94% lower from last week, while the number of traders net-short is 8.42% lower than yesterday and 22.95% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/JPY prices may continue to rise.
Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/JPY trading bias.
NZD/JPY Daily Chart – Challenging Confluent Support
The NZD/JPY exchange rate is perched precariously above key confluent support at the 61.8% Fibonacci (75.77) and uptrend extending from the March 2020 low, after plunging 4.2% from the monthly high set on March 18 (79.14).
The development of the RSI is indicative of swelling bullish momentum, as the oscillator dives below 40 for the first time since late-October 2020.
That being said, a resumption of the primary uptrend extending from March last year is still in play, if the 12-month uptrend and range support at 75.25 – 75.50 holds firm.
A daily close back above the 55-EMA (76.32) is required to pave the way for the exchange rate to retest former support-turned-resistance at the February 26 low (76.97). Breaching that opens the door for prices to probe the yearly high (79.21).
However, collapsing below 75.25 would probably trigger further losses and bring the January low (73.65) into the crosshairs.
NZD/JPY daily chart created using Tradingview
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
