More tricks than treats from BOJ and RBA this Halloween

The Australian dollar and the Japanese yen are the obvious choices when it comes down to trading during the Asian session tonight. Not only do we have rate decisions from central banks of both Australia and Japan, but we will also have the latest manufacturing PMI data from China, the world’s second largest economy and Australia’s largest trading partner. Clearly, the Aussie and/or yen could move violently should we see major surprises from these central banks, or a horror show from Chinese data. But don’t have any nightmares, as we are expecting more tricks than treats from the Bank of Japan and the Reserve Bank of Australia on this Halloween night.

The Reserve Bank of Australia is not expected to make any changes to interest rates after it loosened its policy in August. However, it is the tone of the RBA’s policy statement that could impact the Australian dollar. Due to mixed economic data, not many analysts are quite sure what to expect from the RBA in terms of its outlook on the future path of monetary policy. After all, the latest consumer inflation data was hotter than expected, while employment numbers were, well, poor. The situation is complicated by the housing market situation in places like Sydney and Melbourne where it is becoming increasingly unaffordable for citizens to purchase homes. Many analysts, including ourselves, therefore expect the RBA will leave its policy unchanged but that it will lean more towards the dovish side in the statement. If so, this could weigh on the Aussie dollar, but as it is an expected outcome the impact on the currency could be a mild one. Thus the bigger risk is if the RBA were to sound more hawkish.

As far as the Bank of Japan is concerned, well, it is not expected to make any major policy changes either. The BoJ’s Governor Haruhiko Kuroda has already made it clear that there is no need for more easing measures to be announced at this stage, but that there may be some modification to their inflation forecasts. The yen could therefore drop if the BoJ predicts that inflation will hit their 2% target much later than anticipated, as this will mean the extraordinary easy policy will remain in place longer than would otherwise be the case.

For Aussie traders, there will be one more thing to consider in addition to the RBA and BOJ policy rate decisions: PMI data from China. In fact, it is not just one PMI, but three: the official services and manufacturing PMIs, as well as the somewhat more trustworthy Caixin Manufacturing PMI. The latter is expected to show a rise to 50.2 for October from 50.1 in September.  Any significant deviations from this expected number could move the Aussie and potentially stocks sharply in one or the other direction.

Technical outlook: AUD/JPY

Now it is not the first time that we have looked at the AUD/JPY in recent times. In fact, we looked at this pair last Tuesday and as you will see, there hasn’t been any major changes on the technical front. So what we said then still remains valid today. But I will repeat what we highlighted anyway. As can be seen from the daily chart, the AUD/JPY has again neared to that key technical level today: 0.80. Around this psychologically-important level, we have several other technical factors also converging, above all the 200-day moving average at 101.10. This particular moving average has offered strong resistance in the past and is still pointing lower. There is also a bearish trend line to consider which has been in place for almost a year now. What’s more, this 0.80 area had been previously resistance, too. So, there are lots of reasons why the AUD/JPY could retreat from this level. If so, the bears would then like to see the breakdown of some key supports, starting with the area around 78.85/79.10 which has held as support after several attempts to break lower.

But the bulls would argue that the recent trend has been bullish, as highlighted for example by AUD/JPY making higher highs and higher lows on smaller time frames. In addition, the 50-day moving average has started to point higher again and price is holding above it currently. A convincing break above the 0.8000-35 resistance area is what is required for this group of market participants to become more vocal. If seen, we could then see the start of a more significant rally towards the Fibonacci levels shown on the chart.  The immediate bullish objective could be the previous high around 81.50.