87.37 is the inverse head and shoulder neckline and 87.64 is the 50% Fibonacci retracement of 2014 high and 2016 low. A break above 87.64 looks likely if we take into account a nice rebound from the weekly 50-MA and the rising bottom formation.
A bullish break in the AUD/JPY could mean risk-on rally in equities! But there is other side as well – Yen is a sitting duck for bears as the BoJ is hell bent on running the yield curve control. Every time the global bond yields rise… its a clear cut sell opportunity for the Yen. A BoC rate hike this week would only boost speculation of rate hike in NZ and Australia. So AUD/JPY may break higher, but may not necessarily be a positive sign for equities…
RBA’s neutral stance has rocked the Aussie freight train. AUD/JPY now shows a big bearish outside or engulfing candle.
Price action since mid-January
The cross has been restricted to a 200-pip range of 85.00-87.00. The 50-DMA has acted as a strong support since January 31. The recent high stands at 87.53 (Dec 15 high).
What is so bullish on the charts?
- The repeated rebound from the 50-DMA plus a bullish RSI and the bullish DMI indicate a potential for a rally.
- However, bulls need to wait for a break above the upper end of the Bollinger band. That would open doors for a rally to 88.62 (Mar 2012 high) levels and possibly to 90.00 levels (monthly 50-MA).
- The weekly chart adds credence to the bullish arguments made above.
- Take note of the rebound from 85.00 levels for five straight weeks.
- Last three weekly candles had long tails… which suggests dip demand. The last week’s close was above strong resistance 86.70 (March 2016 high).
- The upper end of the Bollinger band is seen at 88.33 levels.
Technicals perfectly aligned with Macro/Fundamentals
- The risk assets are on the roll. Trump has promised a big announcement (tax cuts) over the next three weeks. Hence, any dip in the risk assets are likely to be short lived, which means less scope for sharp gains in the Japanese Yen.
- Furthermore, geopolitical risk has dropped as well as Trump is now backing ‘One China’ policy! Strong China export and import numbers reported last week is another good news for the AUD and the risky assets.
- To conclude the long story short, the cross looks set to test major resistance levels seen at 88.33 – 88.62-90.00 levels.
Bearish scenario – Two consecutive daily close below 85.00 levels would signal that the rally from the June 2016 low of 72.44 has topped out – Major Trend Reversal.
Rising trend line breached, head and shoulder neckline at 79.25. Bearish break would expose the next rising trend line support.
Not a good sign, since the pair is often viewed as a risk barometer.