AUD/JPY shrugs off ‘risk’ bounce

Even if Wednesday's bounce by risky assets turns out to be a sustained one, deepening geopolitical and economic pressures should underpin the yen

Stocks back up on White House back-down

Risk appetite makes a comeback, lifting shares and triggering a yen reversal. But even if the bounce is sustained, deepening geopolitical and economic pressures should tilt Japan’s currency higher. Having earlier in the week floated a plan to block Chinese-owned firms from investing in advanced U.S. technology, the White House has now signalled existing procedures may suffice. The Treasury Department is set to recommend strengthening the Committee on Foreign Investment in the United States (CFIUS) review process. Hence, the administration has backed down from tougher measures at the root of this week’s market funk.

Double down

Still, there are good reasons why Wednesday’s ‘risk’ bounce may not end safety seeking flows. Chiefly, the dropped tech plan is a rare change of heart on trade by the Trump administration. With a barrage of new tariffs on allies already in force, higher duties on $50bn in Chinese imports begin next week. Trump has also promised huge counter-retaliation should China go ahead it with its own tariffs in response. Meanwhile, the Commerce Department continues to study new duties on European auto imports, whilst White House hard-liner Peter Navarro has signaled the U.S. will double down.

Market sceptical

The yen market structure also suggests scepticism on the risk bounce. There’s notable demand for option strikes between 105-103 yen, with 2-3-month expiry. More broadly, pressure on Chinese assets, including the yuan, puts currencies linked to China’s huge commodity consumption in the frame. Japan’s strong current account balance, the yen’s resilience to accommodative policy and the Aussie’s lock with base metals make AUD/JPY the key cross right now.

Thoughts on AUD/USD technical chart

On a technical basis, AUD/JPY is barely participating with the risk and yen cross bounce. The spot got no higher than 81.63 on Wednesday before reversing, remaining close to the bottom of the year’s 84.5-80.51 asymmetric range and within sight of last week’s 80.63 3-month low. The latter was 13 pips from 2018’s 80.51 low. The prevailing short-term pattern is a symmetrical triangle – also known as a ‘coil’. It will almost invariably be followed by a breakout as price nears the apex.

Cool coil

However, AUD/JPY has reliably bounced off the converging trend lines since confirmed formation last week. Generally, break outs tend to occur when convergence is much narrower than at present. That suggests at least two more sessions of range trading are likely. The breakout itself could of course go either way, though the tightening triangle is more often a continuation pattern. Again, that implies increasing yen momentum ahead. (Remember falling yen crosses mean the yen is rising.) As ever, the structure must break and stay broken on a closing basis to confirm direction. Confirmed short-term resistance, unfavourable placement of the spot relative to key moving averages (e.g. 50-hour MA) declining oscillators (e.g. RSI) combined with clear fundamental negatives give a break down higher probability.

Technical price chart: AUD/USD spot rate – hourly intervals

Source: Thomson Reuters and City Index

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