Soured sentiment keeps AUD/JPY on the ropes

A combination of weak earnings and housing data fanned concerns of stagflation in the world’s largest economy. Building permits – a leading indicator of economic health – fell -3.2% m/m, which was its weakest print since September. And to add to the fears was Target’s (TGT) profit warning which resulted in the stock plunging -25%. The Nasdaq fell over 5% for the second time since the pandemic and Wall Street was broadly lower.

Wage growth miss overshadows record unemployment for Australia

And this has put AUD/JPY back onto our radar. If we go back a couple of days there was hope that the RBA would hike by 40-bps. Yet softer-than-expected wage growth means this is now looking less likely and helps with potential bearish setups on AUD/JPY.

Yesterday’s wage data – which missed the mark – also removed some of the sparkle from today’s employment report. Which is a shame because unemployment hit a record low of 3.9%, even if headline employment underwhelmed. But ultimately, we do not think today’ report moves the needle much for the RBA.

It is wage growth that now needs to excel to convince the RBA that inflation will remain ‘sustainable’ and force them to hike more aggressively. Yesterday’s wage data miss means they’re more likely to raise by 25 bps, and not the 40-bps traders had hoped for.

What are economic indicators?

Implied volatility remains elevated for AUD pairs

On the 6^th of May we said to “keep an eye on AUD/JPY with sentiment on the back ropes” ahead of its next leg lower. And it didn’t disappoint. The currency cross has fallen over -8.8% since the April high and over -7% since the May high. 1-week implied volatility (IV) for the Australian dollar has risen above the 1-month IV which shows investors remain. And with sentiment once again on the back ropes it remains a cross to watch for further declines.

AUD/JPY daily chart:

We can see on the daily chart that AUD/JPY has seen a 3-wave move which began just beneath the 2016 high / 96.00. Yesterday produced a bearish engulfing (and outside) day to suggest a swing high is now in place, just below a 61.8% Fibonacci retracement level.

A wider trade deficit from Japan helped the yen to catch a bid today, so prices are now retracing within yesterday’s candle. Our bias remains bearish beneath yesterday’s high so looking to fade into such moves to increase the potential reward to risk ratio. Perhaps we’ll see a reversal pattern on an intraday timeframe around 90 which we could consider. At which point the initial target would be 88 (just above last week’s low) then down to the 88.50 area, near the October high, 200-day eMA and Fibonacci projection levels.

How to trade with City Index

You can easily trade with City Index by using these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.