AUD/JPY: Aussie goes from weakest to strongest but renewed selling likely

Aussie has rallied sharply thanks to today’s recovery in the stock markets, the rebound in Chinese yuan and inaction by the RBA.

Thanks to today’s recovery in the stock markets, the rebound in Chinese yuan and inaction by the Reserve Bank of Australia overnight, the Aussie dollar has gone from being the weakest yesterday to the strongest major currency on the day so far. However, if sentiment towards risky assets turn negative again or the situation between the US and China escalates further then the Aussie could weaken again, given its close trade ties with China. What’s more, although the RBA decided to leave monetary policy unchanged, and thus disappointed some expectations for a hat-trick of 25 basis-point rate cuts overnight, it has left the door open for further rate cuts in the upcoming meetings. The RBA said: “It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

So, the fundamental outlook on the Aussie looks far from being bright. From a tactical point of view, we continue to favour looking for bearish setups to emerge on the AUD/JPY rather than AUD/USD, given the yen’s stronger correlation with the stock markets (where things have turned quite volatile of late). We last looked at this pair on Friday and as expected, rates have dropped to test the support trend of the bearish channel from where it has bounced. However, the bears are probably not done just yet as overhead resistance levels are either approaching or being tested. The first such level is at around 72.50/90, which was being tested at the time of writing. If this area holds then we could see the bears emerge and push rates to a new 2019 low towards 71.00 next. However, I would not rule out the prospects of a deeper recovery before the selling potentially resumes. Indeed, an even stronger resistance is potentially in the 74.00-74.35 range, an area which was formerly a key support zone.

Source: Trading View and City Index.

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