A technically and fundamentally appealing trade is developed in the Australian Dollar Against the Japanese Yen pair.
Enter at lower timeframe trend line break.
Stops below the last supply zone.
Take profit at the swing highs.
Fundamental Drivers:
Australian Dollar (AUD)
Fundamental Bias: Neutral
1. The country’s economic and health developments
There are 4 key drivers we are watching for Australia’s med-term outlook: [1] The virus situation – a Q3 GDP contraction is priced in, so eyes are firmly on Q4 data to see whether a strong rebound is possible. Look out for any good news with more reduction of lockdown measures. [2] China – the slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether the CCP and PBoC steps up with stimulus for the economy and possible support for the real estate sector. Politically, the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. [3] Commodities – Iron Ore, (24% of exports) have continued its drop, and to make matters worse we’ve seen Coal (18% of exports) prices are pushing lower alongside it. This is negative for Aus terms of trade and definitely a risk to keep on the radar in the sessions ahead. [4] Global growth – as a favourite risk proxy, the market’s current question about whether we see a reflation in Q4 will be an important consideration for the AUD.
2. The Monetary Policy outlook for the RBA
The RBA’s November decision can be summed up as hawkish in deed but dovish in word. The bank abandoned YCC as markets suspected as they didn’t choose to defend their target in the days leading into the meeting, and they also abandoned their date-based forward guidance that said a lift off in rates would only be appropriate in 2024, by rather saying that conditions for a hike will take ‘some time’. However, Governor Lowe tried his best to sound as dovish as possible by saying that they are prepared to look through temporary spikes in inflation and that market pricing for a hike by 2022 is far away from where their outlook is and is highly unlikely. Even though not all market participants would agree, we think the outlook for growth, inflation, employment and wages do suggest that a late 2022 could be possible, especially if the economy sees a solid bounce back from covid. However, for now, the bank has stuck to an overall dovish tone. Given the importance of wages to their inflation outlook, keeping close track of this week’s Q3 wage growth will be very important for the AUD.
3. Developments surrounding the global risk outlook.
As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver.
Japanese Yen (JPY)
Fundamental Bias: Bearish
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track.