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    Australian Dollar / Yen Outlook: ‘Aussie’ Strong Enough to Halt the Yen’s Advance at 84.00

    Updated: May 21, 2018  

    Following last week’s broad strength in the Japanese yen – strength that produced a sharp fall in AUD/JPY from 87.00 to 84.00 – Australian dollar bulls will today be breathing a sigh of relief following the yen’s inability to break further below the 84 handle. At the end of New York’s FX session on Tuesday the Australian dollar had gained around 0.7% against the Japanese currency, with one AUD now buying 84.85 JPY.

    Disappointing Retail Sales Data Weighs on the Yen



    AUD/JPY 1 Week Chart

    Although much of the rally away from the 84 handle in AUD/JPY occurred prior to this morning’s Japanese retail sales data (released a little before 3am in Sydney), any case for further weakness in the yen has surely been bolstered by the disappointing sales figures.

    The market consensus for February’s annualized retail sales had been +0.7%. The actual figure came in not only below consensus at +0.1%, but also hinted at the emergence of a trend of reduced consumer buying in Japan in 2017. Remember that in December, annualized retail sales were +1.7%; in January, +1.0%; and now in February, only +0.1%.

    Of course, any negative impact to the yen from such data will be welcomed by Australian importers and those considering purchasing from Japan.

    Technical Reasons for a Pause at 84.00

    Australian dollar watchers will no doubt have seen the obvious swing low that formed in December just below 84.00 on the AUD/JPY daily charts. Given the absolute lack of any technical support in the pair until possibly 82.16 (the 38.2% Fibonacci retracement of the June-February rally), it seems fair to say that if there was going to be a pause in the decline of the Australian dollar-to-yen rate, it would have been here.  

    Indeed, it seems appropriate for yen buyers to have a technically-driven rethink at this stage given that, simultaneously, the yen is also meeting resistance against the US dollar (USD/JPY has bounced off 110.00).

    Technical reasons for a halt in yen strength were also described this morning by Vincent Cignarella – a market commentator at Bloomberg. Cignarella had this to say about the yen against the US dollar. Conclusions drawn are equally applicable to yen movements against the ‘Aussie’.

    “Stochastic measures which track price movements identifying stretched valuations in USDJPY are in the deepest oversold territory in seven months, suggesting asymmetrical upside risk for the dollar [and weakness in the yen]. Furthermore, Ichimoku Cloud analysis confirms that the base of the cloud, which marked the previous dollar’s rally, is also at 109.93. The confluence of these technical signals lends substantial support to the dollar forming a near-term base [and for the yen forming a near-term ceiling].”

    Will Trump Drive the Yen Down, Australian Dollar Up?

    Anybody following financial markets since November’s US election will know just how much exchange rates have been driven by ‘Trumpflation’, or the ‘Trump trade’ – a trade which jumped all over the back of promises by the new President to implement inflationary policies, which include up to $1 trillion in infrastructure spending and a significant reduction in corporation tax. These promises fueled carry trades and seemingly led every man (or woman) and his (or her) dog to get long up to their eyeballs in the ‘greenback’.

    For those unfamiliar with the ‘carry trade’, this is a common strategy in foreign exchange markets in which an investor borrows in a currency with a low interest rate and uses those funds to invest in a currency paying a higher rate. In recent years, one of the most popular carry strategies has been to sell (borrow) yen to buy (invest in) Australian dollars, although several major banks, including Morgan Stanley, are currently promoting euro-funded carry trades.

    Such was the carry trade boosted following Trump’s surprise election win, that USD/JPY rallied a fairly extraordinary 17% and AUD/JPY by 14% in the twenty-six trading days following the election result.

    The question asked almost daily by financial news publications and market commentators is whether or not the ‘Trump trade’ is still on.

    Although that particular question remains unanswered, some analysts have suggested in recent days that following Trump’s embarrassing defeat on healthcare reform last week – his first major legislative defeat – that the US President will be looking to make up for this by bringing forward infrastructure spending to 2017 (previously thought to be implemented in 2018), at least according to Jonathan Swan of news group Axios, who cites a White House source with direct knowledge of the plans.

    According to Swan, “Trump needs fast victories and infrastructure is something that’s big, flashy and potentially bipartisan.”

    It’s likely that any faster implementation of Trump’s infrastructure plans, and any announcements to that effect, or possibly any increase in the scale of infrastructure spending, would boost the Australian dollar-to-yen rate. For this reason, exchange rate watchers should keep an eagle eye on developments coming from the White House in coming days, since these will likely drive market direction.

     
     
    Posted under: #News #AUD #JPY
     

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