Soured sentiment keeps AUD/JPY on the ropes

Concerns that the US is headed for stagflation weighed on sentiment yesterday, which has placed AUD/JPY back onto our bearish watchlist.

Australia

A combination of weak earnings and housing data fanned concerns of stagflation in the world’s largest economy. Building permits – a leading indicator of economic health – fell -3.2% m/m, which was its weakest print since September. And to add to the fears was Target’s (TGT) profit warning which resulted in the stock plunging -25%. The Nasdaq fell over 5% for the second time since the pandemic and Wall Street was broadly lower.

 

Wage growth miss overshadows record unemployment for Australia

20220519wagegrowth

And this has put AUD/JPY back onto our radar. If we go back a couple of days there was hope that the RBA would hike by 40-bps. Yet softer-than-expected wage growth means this is now looking less likely and helps with potential bearish setups on AUD/JPY.

Yesterday’s wage data – which missed the mark – also removed some of the sparkle from today’s employment report. Which is a shame because unemployment hit a record low of 3.9%, even if headline employment underwhelmed. But ultimately, we do not think today’ report moves the needle much for the RBA.

It is wage growth that now needs to excel to convince the RBA that inflation will remain ‘sustainable’ and force them to hike more aggressively. Yesterday’s wage data miss means they’re more likely to raise by 25 bps, and not the 40-bps traders had hoped for.

 

Implied volatility remains elevated for AUD pairs

20220519impliedvolatility

On the 6th of May we said to “keep an eye on AUD/JPY with sentiment on the back ropes” ahead of its next leg lower. And it didn’t disappoint. The currency cross has fallen over -8.8% since the April high and over -7% since the May high. 1-week implied volatility (IV) for the Australian dollar has risen above the 1-month IV which shows investors remain. And with sentiment once again on the back ropes it remains a cross to watch for further declines.

 

AUD/JPY daily chart:

20220519audjpyFX

We can see on the daily chart that AUD/JPY has seen a 3-wave move which began just beneath the 2016 high / 96.00. Yesterday produced a bearish engulfing (and outside) day to suggest a swing high is now in place, just below a 61.8% Fibonacci retracement level.

A wider trade deficit from Japan helped the yen to catch a bid today, so prices are now retracing within yesterday’s candle. Our bias remains bearish beneath yesterday’s high so looking to fade into such moves to increase the potential reward to risk ratio. Perhaps we’ll see a reversal pattern on an intraday timeframe around 90 which we could consider. At which point the initial target would be 88 (just above last week’s low) then down to the 88.50 area, near the October high, 200-day eMA and Fibonacci projection levels.

 

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account