AUD/JPY Move Lower Expected to Continue

Cory Mitchell, CMT

The AUD/JPY has sustained a downward trajectory going back to late 2017. The descending regression channel captures the bulk of the action, while ignoring short-term extremes. 

The price has also stayed below the 200-day exponential moving average, nearly the entire time, since early 2018.

This comes despite the Australian dollar (AUD) having a higher interest rate than the Japanese yen (JPY). This means those holding short positions will pay the interest rate differential between the AUD 0.75% interest rate and the JPY -0.1% rate. 

The spread has been dropping, and is expected to continue dropping, helping to explain the longer-term drop in the AUD/JPY. It isn't just about where the rates are now, it's where they likely to be in the future. 

The Bank of Japan (BOJ) hasn't dropped rates since early 2016. The Reserve Bank of Australia (RBA) dropped rates in October, preceded by a rate drop earlier in the year. 

TradingEconomics forecasts further rate drops, with the RBA expected to drop the AUD interest rate to 0.25% within the next twelve months. 

TradingEconomics forecast for Australian interest rates. Dec. 10 2019
TradingEconomics

AUD/JPY Technical Outlook

The AUDJPY remains in descending channel going back to late-2018, and the price reached the top of the channel in early November. 

AUDJPY technical outlook daily chart Dec 10 2019
TradingView

There is nothing to indicate the top of the regression channel has any significance. The price can overshoot or undershoot that mark. It simply serves an area to watch for reversals. 

After reaching the top of the channel the price has retraced to a rising trendline. The trendline marks the price rise from the bottom of the channel in August. 

The price is likely going to continue working its way back toward the channel bottom and support between 70.80 and 70.

While an overall move lower is expected, a bounce off the rising trendline could see the price rally back into the 75.60 to 76 region. This would set up a potential double-top or false breakout above the prior swing high. Both these scenarios provide a potential short trade once again.

Long positions look to have limited upside potential on the daily chart and higher time frames, but a pop could be worth trading with a relatively tight stop loss. There is also the benefit of collecting some rollover interest on the long side. 

On the short side, there appears to be more room to run. The bottom of the channel and the prior low is a ways away, providing for very favorable reward-to-risk ratios on short trades. The downside is paying interest daily on short positions. 

By Cory Mitchell, CMT. Join me on Twitter @corymitc.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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