Summary
Another failed attempt to overwhelm sellers parked below 95.00 fuelled a sharp reversal in AUD/JPY this week, putting it on the verge of breaking the downtrend it’s been bumping up against for months. Recent moves have aligned more with longer-dated interest rate differentials between the US and Japan rather than traditional drivers like risk appetite and yield spreads between Japan and Australia. A bearish break in US Treasury futures on Wednesday may be the catalyst needed to ignite a bullish breakout for AUD/JPY.
AUD/JPY Bordering on Bullish Breakout
While hotter-than-expected US inflation data for January drove much of Wednesday’s surge in JPY pairs—alongside renewed hopes for a Ukraine peace deal—the bullish move in AUD/JPY started earlier this week.
As seen in the chart below, bulls managed to repel another attempt to absorb bids layered beneath 95.00, triggering a strong rebound and printing a key reversal candle on the daily. From there, it’s been one-way traffic, leaving AUD/JPY on the cusp of a sustained bullish breakout.
Source: TradingView
In early Asia on Thursday, AUD/JPY trades above long-standing downtrend resistance dating back to July’s highs. It also cleared 96.80, a minor level that acted as support and resistance earlier this year. With MACD and RSI (14) flashing fresh bullish signals, the technical setup looks more constructive for this breakout to stick, unlike the failed attempt in January.
If the price holds above the intersection of the downtrend and 96.80 today, it creates a bullish setup where longs could be placed above the level with a stop beneath for protection.
Resistance may emerge around 97.78—a level that provided support and resistance in January—but 99.10 screens as a more suitable target for those seeking more from the trade. Above that, the next battleground would be around 100.
If the trendline break fails to hold, as it did in January, the bullish bias would be invalidated, opening the door for fresh bearish positions.
Monitor Bearish Bond Breakout
There’s little major event risk left this week, though US producer price inflation and retail sales over the next two days should be monitored. Japanese producer price inflation, due shortly, is also worth tracking.
Also, keep an eye on US 10-year Treasury yields which have maintained a strong correlation with AUD/JPY, with a 0.86 coefficient over the past month—outpacing yield differentials between the US-Japan and Australia-Japan.
The bearish break of the rising wedge in US 10-year Treasury futures post the January inflation report increases the risk of a retest of the year’s lows. Since bond prices move inversely to yields, that suggests upside risks for yields which could support AUD/JPY.
Source: TradingView