Market News & Analysis

AUD/JPY looks set for bullish breakout ahead of key events in Asia next week

As mentioned in my gold report earlier, the dollar weakness has been taking turns throughout this year as global central banks started to drop their dovish policy biases one by one. After a sharp rally at the end of last year, the dollar first started falling against its major European rivals – most notably the euro – and this theme continued throughout the first half of the year and beyond. Then the Canadian dollar surged, causing the USD/CAD to break down as the Bank of Canada became the first major central bank to follow the footsteps of the Federal Reserve in hiking interest rates after several years of extraordinary loose monetary policy. Now it could be the Australian dollar's turn to turn up the heat with the AUD/USD appears to be finally breaking away from that key 0.7750 hurdle where it had found strong resistance in the past.

The Aussie has been supported not just due to the domestic economy's outperformance but also by rebounding base metal prices thanks to a brighter outlook for the world's second largest economy and major commodity consumer, China. The latter is the former's largest trading partner, importing mainly base metals including iron ore. This week's release of stronger-than-expected trade figures has been among a handful of macro pointers that suggest the Chinese economy may have avoided a hard or soft landing. With the world economy recovering from the aftermath of the global financial crisis, demand for Chinese exports should continue to rise over time. Domestically, the Chinese consumer is also getting wealthier and with a growing population, the demand outlook appears favourable too. This bodes well for the Australian economy, which means the Reserve Bank of Australia could be very close to start talking about rate rises again which in turn should support its currency.

China will remain in focus early next week with the release of GDP, industrial production and retail sales on Monday. Form Australia, we will have minutes of the RBA’s last policy meeting on Tuesday, followed by domestic employment figures on Thursday. On Thursday, the Bank of Japan is likely to again signal its intent to keep monetary policy loose for the foreseeable future, while the European Central Bank may provide hints about tapering its QE programme. The BOJ has until now refused to join other central banks in dropping its dovish stance as it continues to fight against deflation and anaemic growth in Japan. Although the USD/JPY fell today in response to the disappointing US inflation and retail sales data, this pair has nonetheless been among the strongest of USD pairs out there. Thus, if the recovery for the Australian dollar continues, it may perform better against the Japanese yen than the US dollar, for the USD/JPY still looks overall bullish despite its retracement this week. Indeed, there is a possibility that the greenback may have a better second half this year given the Fed's plans to raise interest rates further and reduce its balance sheet. Although today's US data suggests otherwise, things could pick up again in the coming months.

Given the above fundamental considerations, the AUD/JPY looks set to rise further and at the very least probe liquidity above the most significant high at 88.15/16 area in the coming days. Whether or not it will then be able to hold above this level remains to be seen, but I wouldn’t bet against it given how price has approached this level: nice and steady as opposed to a spike up to this level which is indicative of stop raids. Indeed, the short term trend certainly looks bullish with price making a couple of higher highs and higher lows ever since it bottomed out in the middle of last year. The uptrend has been confirmed by rising short-term moving averages, which is a more objective way of determining the trend. The long-term 200-wek average is flattening which is also a positive sign. At this stage therefore the path of least resistance is to the upside and will remain that way until such a time we see a distinct reversal pattern unfold. Either that or if a key support breaks down first, such as the 86.95-87.50 range. Even so, the long-term trend would remain bullish while price holds above the bullish trend line. 

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