AUD/JPY holds in corrective territories with 74 handle in sight
- AUD/JPY bounces back as Reserve Bank of Australia holds and US benchmarks recover Friday's rout.
- AUD/JPY reaching towards the 38.2% Fibo of the 27th Dec-YTD range.
AUD/JPY has burst through the sell-stop territory on the 73 handle, an outcome discussed in yesterday's pre-RBA meeting analysis. The RBA Board kept the cash rate at 0.75% in February with a less dovish tone that had been presumed by markets leading up to the event, pricing it into the Aussie. Unchanged from the central scenario presented in the last forecast update in November, the RBA expects that the Australian economy to grow by around 2.75% this year and 3 per cent next year, outpacing the growth rates over the past two years. Also, with the statement that “inflation is expected to increase gradually to 2 per cent over the next couple of years”, traders began paring back expectations of imminent rate cuts. Only a month or so ago the market had been confident that the RBA would be cutting rates at this month's policy meeting. Instead, traders were taking on board that the RBA does indeed believe that the current policy remains very supportive.
However, while December's employment change data registered a far bigger than expected 28.9K gain with the unemployment number continuing to improve as well, along with Q4 CPI inflation data modestly stronger than expected, the data is still not quite there yet. CPI, for instance, is still below the RBA’s target. We are yet to see the impact of the bushfires and the coronavirus on the economy. Moreover, the RBA stated that “it is reasonable to expect that an extended period of low rates will be required in Australia”, thus leaving the door open for further rate cuts, maintaining that “it remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.
US/Sino trade deal in jeopardy
Additionally, the US and Chinese trade deal could be in jeopardy considering the news that China is requiring the US to be lenient in what was agreed due to the impact of the coronavirus, which could be a spanner in the works for the Aussie which trades as a proxy to the trade war saga. "It has been our long-standing view that tensions between the US and China will erupt again in the months ahead as talks regarding phase 2 of the trade talks start again," analysts at Rabobank argued.
"While trade talks will likely fall into the shadows cast by the coronavirus, this factor carries its own range of risks for Australia. In view of the risks to growth and the AUD’s sensitivity to commodities prices, we see further downside risk for AUD/USD and look for a move towards 0.65 medium-term."
AUD/JPY will continue to be a highly sensitive cross to risk factors vulnerable to a re-run of 72 the figure at the next breakdown in fickle sentiment among investors of global financial and commodity markets. For now, the bulls eye a correction back to the 74 handle to complete a 38.2% Fibo retracement. A 50% mean reversion opens the mid-point of the 74 handle. However, non-committed bulls will be looking to cash in such lofty heights which could lead to a period of consolidation until the next catalyst comes along. It is worth noting that the current resistance around 74 the figure is mapped out on a weekly basis also.