The AUDJPY pair works as a great barometer for gauging risk appetite in the markets. Given the Australian dollar’s link to commodity prices and the Chinese economy, AUD is very often a strong signifier of whether the markets are trading offensively or defensively.
Similarly, the Japanese Yen is a well-known safe-haven. The currency typically rallies during times of global uncertainty and poor economic performance. As a result, when AUD is rallying due to risk on behavior, JPY tends to trade lower and vice versa; when JPY is rallying due to safe-haven inflow, AUD tends to trade lower.
So, what is the AUDJPY telling us right now?
After beginning the year above the 76 figure, on the back of a firm rally over Q3 2019 which was driven by positive expectations in the US/China trade space, AUDJPY has since reversed and traded as low as 72 before reversing to current levels just above 73.
The outbreak of coronavirus this year has taken the steam out of the US/China rally. This saw price trading from lows of around 70 last summer to the 76 levels seen earlier this year. With commodities prices having fallen and fears over the impact on the Chinese economy, AUD has been under heavy selling pressure. Domestically, things have also been bad for Australia with the wildfires which ravaged parts of the country in January.
The Japanese yen has been a strong beneficiary so far this year. Traders have been flooding into the traditional safe-haven currency as a means of protecting their capital from the adverse reactions seen in higher-yielding assets. The move into JPY has seen the currency rising against most in the G10 space except for the US dollar.
Outlook for AUDJPY
The Aussie has been performing better in February on the back of a more optimistic tone from the RBA. They held rates unchanged at their last meeting, despite increased expectations of a rate cut. However, with the damage from coronavirus only just starting to make itself known, the market could be in for a fuller risk-off move.
Equities have been shrugging off the risks from the virus over recent weeks as deaths have been mainly limited to China. However, the economic impact could prove to be severe. This week, HSBC announced it will cut 35000 jobs in response to a 56% fall in profits. They attributed this fall (in part) to the coronavirus outbreak (along with Brexit and US/China uncertainty). Apple also announced that it will miss first-quarter earnings due to the virus’ impact on Chinese activity. If data out of China over the coming month shows considerable weakness, this could cause a further risk-off move, sending AUDJPY lower.
After recovering from a test of the bear channel now around the 72.40 mark, AUDJPY has since traded back up to the 73.50 level where it is currently stalling. This is ahead of the bigger 74.46 level resistance. While below here, focus is on a further push lower within the bearish channel, targeting 72.40 lows, followed by 71.88. If price breaks to the topside, above 74.46, focus will be on a test of the channel top.