Despite the latest round of weakness seen among Australian dollar currency pairs, the AUD/JPY pair is still on a solid uptrend with a potential correction taking place. As you can see on the 4-hour time frame, AUD/JPY Is making its way down to test the rising trend line connecting the recent lows of price action.
The Fibonacci retracement tool shows that the 61.8% to 50% levels are in line with the trend line, with the 94.00 major psychological support level within the same area. The pair could bounce from that zone and make its way back to the former highs, depending on how economic data turns out.
So far, Australia’s figures have disappointed as the CPI fell short of expectations. The report showed a 0.6% quarterly uptick in price levels instead of the estimated 0.8% increase. This puts less pressure on the Reserve Bank of Australia to hike interest rates for now, as tighter monetary policy could result to weaker inflationary movement.
Despite that, the fundamental bias still favors the Australian dollar over the Japanese yen. After all, the RBA is no longer looking to cut interest rates in the foreseeable future while the Bank of Japan is still open to further easing depending on how the sales tax hike affects the economy in the next few months.
Data from Japan has been promising though, as the CPI figures showed another rise in price levels, reminding traders that Japan is doing a decent job at warding off deflation. Risk aversion has also favored the lower-yielding yen, as traders try to lighten up on their higher-yielding holdings.
A bounce from the 94.00 area and ascending trend line could take AUD/JPY back to its previous highs near the 96.50 minor psychological resistance but it would take a good strong market catalyst to let this play out. A significant improvement in risk appetite could also support the Australian dollar against the Japanese yen.
For now, the economic calendar has no major reports lined up from both economies. Australian banks and financial markets are closed for now, which leads to less volatility among Aussie pairs. The economic events next week could provide more clues on the direction of the pair, as more Aussie weakness might result to a sharp reversal for this pair.
Prepared by Aayush Jindal, Chief Technical Strategist at Capital Trust Markets
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