AUD/JPY: Bulls drop the ball on their New Year’s Resolution

<p>According to the Chinese Zodiac, 2016 is “The Year of the Monkey” but based on trade so far today, it looks more like the Year […]</p>

According to the Chinese Zodiac, 2016 is “The Year of the Monkey” but based on trade so far today, it looks more like the Year of the Bear. A big wave of risk aversion hit the market at the start of the New Year, driving riskier assets lower across the board. Speaking of China, the epicenter of today’s selloff appears to be the Middle Kingdom itself, where both the Caixin (48.2) and official (49.7) Manufacturing PMI reports missed expectations. By the end of the Asian trading session, the benchmark Shanghai Composite stock index had fallen nearly 7%, triggering circuit breakers that briefly suspended trade.

Not surprisingly, this risk-off trading has reverberated throughout global trade, driving European stocks and US equity futures sharply lower at the expense of gold and safe haven currencies like the Japanese yen. Meanwhile, higher-yielding currencies like the Australian and New Zealand dollars have borne the brunt of the selling pressure in the FX market.

AUD/JPY in particular is worth watching. Beyond representing a global proxy for risk appetite and the carry trade, the pair also has a strong correlation with major equity indices and so far, the outlook appears bleak. With today’s drop, AUD/JPY has fallen conclusively below the four-month bullish trend line off the August lows, carving out a potential large Bearish Marubozu Candle* in the process. For the uninitiated, this pattern shows strong selling pressure and often portends more weakness in the coming days.

The secondary indicators paint a similarly bearish picture. The MACD indicator is now trending lower below its signal line and the “0” level, while the RSI has broken below its own bullish trend line, confirming the breakdown in the exchange rate itself. As long as AUD/JPY remains below previous support and the broken trend line around 86.50, more weakness is likely. To the downside, traders may key in on the Fibonacci retracements of the recent rally, including the 61.8% retracement at 85.35 and the 78.6% retracement near 83.90.

At least on the first trading day of the year, it looks like AUD/JPY bulls have already dropped the ball on their New Year’s Resolution.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.

AUDJPY1-4-2016 8-46-24 AM

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.