Bulls in full control of AUD/JPY

The Australian Financial Review is detailing that Australian company Toll Holdings has received a takeover offer from Japan Post in a deal worth around A$5 billion.

Source: Bloomberg

This of course should be taken as an AUD/JPY positive as it implies sizeable capital flows into Australia.

Implied volatility in the FX or equity market is still elevated but certainly well off the recent highs, which is good for carry structures and therefore AUD/JPY. We are also seeing further positive moves in equities with market scuttlebutt that Greece is set to sign an extension to its loan agreements.

Looking at the price action in the pair, we can see the bulls are in full control with AUD/JPY printing a bullish reversal (ie. trading below Monday’s low, reversing course and trading nicely above Tuesday’s high). The 50% retracement of the 20 January to 3 February sell-off has capped the rally at ¥93.37, so a close above here could be a strong short-term buy signal.

There are a number of reasons to be sceptical, however. Reserve Bank of Australia member John Edwards has detailed this morning that a lower AUD would ‘be useful’ but most in the market already know that. Iron ore and gold prices have fallen hard overnight, which won’t help either.

It is also worth looking at the Japanese bond market as both short- and long-term bond yields have seen aggressive selling of late. This is a JPY positive as it indicates that traders are pricing out quantitative easing (QE) expectations, although we saw huge buying coming back into the ten-year bond yesterday, which has caused an outside day reversal and pushed JPY lower across the G10 currency spectrum.

Still, the technicals are certainly becoming more favourable to long positions in the pair, with the MACD trending higher and stochastic momentum also following suit. A break of ¥93.37 suggests a fairly quick move to the 61.8% retracement of the mentioned move at ¥94.31. Downtrend resistance is also seen at ¥94.00.

In today’s session not a lot is expected – I think they certainly won’t be adding to its current QE program at today’s Bank of Japan meeting. I would be most interested in any views on the recent spike in bond yields as this could have a sizeable impact on the JPY.

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