Deteriorating fundamentals could make AUD/JPY a compelling play
If global growth is set for a prolonged slow down and if the recovery in commodity prices is near its peak – then it shouldn’t be too long before risk assets and commodities take a serious drubbing, which could make AUD/JPY a particularly interesting play.
Indeed, AUD/JPY has been working its way lower for over a year – but could now be poised for a big downside break as the dynamics of the global economy look far from promising.
The International Monetary Fund has regularly sounded warnings over a global economic slowdown and has made four downward revisions now with the latest for 2016 being 3.2% -- only just above the 3%, which the Fund considers to be recession territory.
It’s not surprising that corporate earnings growth, the ultimate drivers of stock market rallies, appears to be stalling and share prices could be in for a period of weakness, which could be echoed by risk currencies, such as AUD.
A global slowdown also does not bode well for the commodities complex; which Australia is so reliant upon. Following their spectacular price recovery since the beginning of the year there are question marks over whether oil prices can really progress that far above $50/bbl, while some other industrial commodities, such as copper, have started falling.
But more pertinent for Australia and to AUD is what’s happened to iron ore prices – they’ve been sliding dramatically recently, down 10% last week following a similar fall the week before. Basically production is outstripping demand, stocks are high and a speculative bubble in iron ore futures in China has been punctured by the authorities. Experts in this market believe further falls are in store given the poor state of the steel industry, which uses iron ore as a feedstock.
What’s bad news for AUD is often good news for JPY. If indeed the world is heading towards a long volatile summer of steadily retrenching economic growth and market volatility, then JPY’s safe haven status should come to the fore as investors and traders flee risk assets and currencies.
Indeed, Japan’s efforts to debase its currency, most recently with negative interest rates, don’t seem to be working in terms of decisively weakening JPY. Japan’s authorities could of course go for a truly spectacular intervention by, for example, dramatically scaling up their qualitative quantitative easing programme – but that could run into political flack, especially from abroad. It may instead have to ratchet up its interventions more gradually, and going by recent experience, this may only have a limited relatively short term impact.
However, AUD shouldn’t be completely written off. Rallies could be triggered by the US Federal Reserve publicly throwing in the towel over further rate rises, a solid agreement among oil producers to curb production, China announcing more big infrastructure programmes or even signs of a recovery in global economic growth over the Summer months.
TECHNICAL ANALYSIS: AUD/JPY – well positioned for a break-down
AUD/JPY have been working their way lower since November 2014 when the pair were above 102.00 and Friday closed at around 79.00.
The general anatomy of this trend has consisted of long periods of consolidation, and sometimes even prolonged up moves, interrupted by relatively swift falls. Therefore, it’s important to be ready for when these breakdowns happen, because a large chunk of them can easily be missed.
Indeed, the pair could be in the process of staging another fall having cleared support areas clustered around 79.60-70. Having already fallen from 86.31 to a low of 78.18 on May 5, the question now is over whether AUD/JPY is forming a consolidation pattern or if it is gearing up for an imminent downward move, say down to 70.00-73.00.
The daily MACD still has a sell signal, and the pair have bounced off the lower Bollinger band after having pierced it May 5. The daily RSI was around 36 on Friday and is fairly close to oversold territory, which might limit the scope for a big downward move in the short-term.
Support can be seen at 78.76, 78.18 and 77.59. Any move below 77.50 could see considerable scope for a large fall. However, if consolidation is to be the order of the day, then the pair are likely to challenge resistance levels around 80.45, 81.57 and 82.50.
By Justin Pugsley, Markets Analyst, MahiFX