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AUD/JPY sitting tight at the golden ratio, awaiting the RBA showdown

  • AUD/JPY in all or nothing territories ahead of the RBA.
  • On a hawkish tilt, buy stop liquidity above 0.73 the figure will ignite bear's pain towards 74.00.
  • 72 guards a run to 78.65 Fibo' target at 71.32. 

A AUD/JPY price action is going to be a keen focus for forthcoming days which will follow the Reserve Bank of Australia's interest rate decision and an open-ended emergency surrounding the coronavirus.

AUD/JPY is currently trading towards sell-stop liquidity in Tokyo around 72 the figure having already been pressured below the daily Ichimoku cloud base earlier this year, completing a 50% mean reversion of the August uptrend, resting now at the 61.8% (golden ratio) of the same range and en route to test bullish commitments where it really matters. 

Heading into the RBA today, the cross is oscillating between 72.50 and 72.74, crushed by risk-off money flows which have supported a wave of supply in USD/JPY while US yields deteriorate – (reflation trade in jeopardy; coronavirus prompting global negative-yielding debt pile to grow by more than $2.5T in the last two weeks). However, there had been some let-up overnight. In response to Chinese measures to ease some of the pain, the US 2-year Treasury yields rose slightly, although the marginal uptick in the spread between Japan and US is hardly a game-changer for USD/JPY. In fact, the 10-year later unwound gains, minimising chances of a significant correction in the yen at this juncture.  

A less dovish RBA rhetoric to set off an avalanche of Aussie buy stops

While the Australian bond market will not be immune to the swings in global sentiment, driven by fears and uncertainty around the virus impacts, any hawkish surprise from today's RBA, where markets are pricing a 25% chance of easing, should see a meaningful correction in the Aussie.

While there is little chance of the RBA expressing a full contentment with how the Aussie economy is faring up, (hard to be hawkish when Q3 Private consumption growth was at its lowest levels since GFC), with the mention of the improvements in data, (CPI/Unemployment, specifically), accompanied by a cautiously optimistic outlook for the global and domestic economy that is showing some promising signs of a “gentle turn", there is plenty of but stop liquidity for bulls to plough through between here and into the 0.68 handle vs the greenback. Moreover, the USD/CNH is yet to recover any of yesterday's bounce from under 6.9900 to 7.0200. 

In the meantime, analysts at TD Securities have compiled their outlook for the various possible outcomes, as follows: 

  • Cuts (<10%): AUD may find support around US$0.66.
  • On hold but more dovish (<30%): What could be dovish is the removal of 'gentle turning point' if it is accompanied with another dovish commentary.
  • On hold - retains easing bias (60%)On hold but more dovish (<30%): We expect the RBA to flag it is in 'wait and see' mode.
  • On hold but more hawkish (<1%): Initial target US$0.6725. Potential to trade above US$0.6740, s/t resistance toward US$0.6775.

All in all, it would appear that most will concur with the assessment of the risks that we should not expect another cut until April. However, the speech on Wednesday will be most interesting in moving past today's event. The RBA governor could provide an assessment of how important the exogenous shocks of the bushfires and coronavirus have been to their immediate thinking – forecasts will then be revealed and further elaborated upon in Friday’s SoMP.

"Given that the speech is entitled “The Year Ahead” and delivered at the National Press Club, the audience will be even larger than usual and we would expect him to reveal the Bank’s new expectations for the economy’s key macroeconomic variables," analysts at Westpac explained. 

AUD/JPY levels

Technical levels can be seen below, although compelling territories within the Fibonacci retracements come as 72.40, 71.30 to the downside while the upside opens 73.20 and 74 the figure. 

 

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