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Buy AUD/JPY: GDP, RBA Policy Signal Strong Upside

July 11, 2014

The Australian dollar has been under pressure for most of this year, as declining mining investment and reduced raw materials demand in China has weighed on prospects for the domestic economy. Weakness in exports and retail sales has prompted the Reserve Bank of Australia (RBA) to cut interest rates to record lows at 2.5%. Given the currency's traditional position as the number one high-yielder amongst the majors, these events created a scenario where most of the attraction in holding Aussie positions long term was removed.

Additionally, the currency's tendency to sell-off during bouts of risk aversion leaves long positions vulnerable to losses during periods of uncertainty. Disappointing economic performance in emerging markets has been prevalent this year, and when we combine this with the prospect of reduced monetary stimulus from the U.S. Federal Reserve, the possibility of strong global growth look unlikely over the next few quarters.

Potential Bull Drivers for the Aussie

When we take the combination of these factors into consideration, it was not entirely surprising to see this year's strong moves to the downside in the Australian dollar. But this week, some new developments have been seen and the accompanying rallies could be the initial moves in a burgeoning uptrend. First, we have the latest policy statement from the RBA, which surprised markets by removing any hints of additional easing bias. At this stage, it is looking unlikely we will see further cuts in interest rates before the end of the year and related assets like the CurrencyShares Australiandollar Trust ETF (FXA) should continue to see gains as traders price-in these changes in bias.

Supporting this outlook is the latest round of GDP figures in Australia, which shows that some of the weakness seen in some industry sectors has not had a significant impact on the economy as a whole. Second quarter GDP expanded at a rate of 2.6% year-over-year, firmly above the consensus expectation of 2.4%. Overall, this strengthens the prospects for the Australian dollar as a carry trade beneficiary. Carry trades perform best in economic environments characterized by sustainable global growth, and with the recovery proceeding largely in line with expectations in both the U.S. and the eurozone, support the outlook for long term bullish positions in currency pairs like the AUD/JPY.

Aussie, Yen Chart Perspective

(Chart Source: Orbex)

In order to do this we must first assess the main JPY trends using the USD/JPY, shown above. When looking for long term trade ideas, the best scenarios unfold when the fundamental backdrop agrees with that is seen from a price perspective. For the AUD/JPY, a strong case can be made for "buy" positions at current levels.

2218401-1378313226682881-Richard-Cox.png

2218401-13783132820509906-Richard-Cox.pn

On the Daily charts, prices have bounce off of support at key Fibonacci levels. Specifically, the key area can be found at 86.30, which is the 61.8% Fibonacci retracement of the rally from 74.35. Strengthening the validity of this support level is the fact that a bullish MACD reading comes in conjunction with a double bottom formation that is in-line with our favored 61.8% retracement zone.

2218401-13783134781332872-Richard-Cox.pn

Additionally, the short term charts help confirm the bullish scenario. On the 4-hour charts, prices have push through important historical resistance at 90.10. This confirms the double bottom as momentum in the MACD is suggestive of prolonged gains. In all, the strengthening fundamental backdrop is supported by high-probability technical signals, and this creates a favorable scenario for AUD/JPY bulls in to the final months of the year.

About the author:

RichardCox
Richard Cox is a university teacher in international trade and finance. Lecture halls of 80 to 120 students. Lessons in macroeconomics and price behavior in equity markets. Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stocks, commodities, currencies).

Trade ideas are generally based on time horizons of one to six months.

Follow me on Twitter: @Richard_A_Cox

Visit RichardCox's Website


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