audjpy remains on support for further potential upside as risk aversion eases 1832482016

The recent past week had seen a bout of risk aversion behavior resurfaced with vengeance triggered by the legal woes of Deutsche Bank as it needed to settle a US$14 billion penalty imposed by the U.S. Department of Justice over mis-selling of mortgage back securities during 2007/08. Market talk had started to circulate that Deutsche Bank did not have sufficient capital to meet such hefty fine despite its CEO reassurance. In addition, leading German lawmakers had also made public comments they were not in favor to bail out Deutsche Bank using public funds. All these negative news flow had caused risk assets such as equities to stage a vicious tumble in the early part of the week as a “bankrupted” Deutsche Bank can create a systemic breakdown of the global financial system and triggered a crisis.

On last Friday 30 September 2016, an unconfirmed media report had sated that Deutsche Bank and the U.S. Department of Justice were closed to an agreement to reduce the fine to US$5.4 billion which lead to a rebound in Deutsche Bank shares at a key support of EUR10.00. Technical elements have started to turn positive at least in the medium-term (1 to 3 weeks) for Deutsche Bank (see attached chart) which is likely to ease the recent strains seen in risk assets and over in the FX space, it will be beneficial for “risk-on proxies” such as the AUD/JPY cross pair.

Deutsche Bank AG

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Secondly, another upcoming ng economic event that can affect the movement on AUD/JPY will be the RBA monetary policy meeting on Tuesday, 04 October 2016. Market consensus is expecting a no cut on its current benchmark policy cash rate which is at a record low of 1.5%. Based on latest data as at 30 September 2016  from the ASX 30 Day Interbank Cash Rate Futures October 2016 contract, it has indicated only a 2% chance of a 25bps cut to 1.25% in this Tuesday meeting (see attached chart).

Also, all six subsequent cuts in the cash rate since December 2012 had been in the months of February, May and August. These months along with November allow RBA officials to assess latest quarterly information on inflation which tends to be out in print one week before its monetary policy meeting (the next quarter release for Q3 will be on 25 October 2016). In addition, these months also coincide with the quarterly release of revised growth and inflation forecasts that can be used as a justification for changes to existing monetary policies. Therefore, a rate cut for this Tuesday meeting seems to be “out of the normal practice” for RBA. Thus, a no cut to the cash rate in this Tuesday meeting accompany by a “balance tone bias” in RBA’s outlook statement is likely to lend support for AUD to prevent a potential collapse.

ASX 30 Day Interbank Cash Rate Futures Tracker

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Now let’s us take a deep dive into AUD/JPY from a technical analysis perspective.

AUD/JPY

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Key elements  

• Since its high of 107.87 printed in October 2007, the AUD/JPY has been evolving within a long-term multi-year “Symmetrical Triangle” consolidation configuration (depicted in brown). Interestingly, the recent most “dramatic risk off” event that was triggered by the Brexit vote has led to a sell-off in the AUD/JPY which has managed to stall right at the lower boundary (support) of the “Symmetrical Triangle” at 74.52/72.00 (see weekly chart).
• The aforementioned long-term support of the “Symmetrical Triangle” at 74.52/72.00 also confluences with a Fibonacci cluster (see weekly chart).
• In conjunction, the weekly (long-term) RSI oscillator has flashed a prior bullish divergence signal at the oversold region and continued to inch upwards. These observations suggest a revival of upside momentum which supports further potential upside price movement of AUD/JPY.
• In the medium-term (1 to 3 weeks), the AUD/JPY has started to show signs of basing above the 74.52/72.00 long-term support zone. Recent decline in price actions has managed to stall at the ascending trendline support (depicted in green) in place since the major swing low area of 24 June 2016 and shaped an impending bullish “Double Bottom” configuration (see 4 hour chart).
• The neckline resistance of the aforementioned  “Double Bottom” stands at 81.60 which confluences with the upper boundary of the long-term descending channel (depicted in pink on the weekly chart) in place since October 2014 high and the 0.618 Fibonacci projection from the 24 June 2016 major swing low (see 4 hour chart).
• The key medium-term support rests at 76.10 (see 4 hour chart).
• The short-term (4 hour) Stochastic oscillator is now coming close to an extreme overbought level which highlights the risk of a minor pull-back at the minor swing high area of 78.17/28 (see 4 hour chart).

Medium-term Key Levels (1 to 3 weeks)

Intermediate support: 77.35

Pivot (key support): 76.10

Resistances: 78.17/28, 79.13 & 81.60

Next supports: 74.00 & 72.00

Conclusion

Positive technical elements have started to emerge which supports a potential upside movement in the AUD/JPY at least in the medium-term (1 to 3 weeks). The AUD/JPY may face some initial resistance at 78.17/28 for a minor pull-back towards the 77.35 intermediate support with a maximum limit set at the 76.10 medium-term pivotal support before another potential upleg materializes to target 79.13 before 81.60.

On the other hand, failure to hold above the 76.10 medium-term pivotal support is likely to invalidate the preferred bullish scenario for another round of choppy downside movement to retest the key long-term support zone of 74.00/72.00.

Charts are from eSignal

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