December 9, 2021 14:06:12

AUD/JPY has historically been known as something of an FX “bellwether” in judging the overall risk mood. The high yielding, risk sensitive aussie is paired with the classic safe haven currency which investors flock to in times of stress. That said, we note that the strong positive correlation with the S&P500 has decoupled this year with the non-stop rise in US equity markets.

Trends in JPY/commodity currencies have turned abruptly since late October. AUD/JPY dropped roughly 8.6% and broke down through the 200-day SMA for only the second time since May 2020. Although this did actually support prices briefly in mid-November, the Omicron news saw a 2.6% fall in the pair. This was the largest one-day move since the peak of the pandemic in March/April 2020.

More recently, positive news has seen the risk mood improve, even though much is still uncertain about the new variant. Numerous countries are heading in to “lockdown lite”, while the news yesterday that Pfizer expects protection with three vaccine doses was met with rising bond yields but struggling equities.

AUD/JPY in neutral mode

Technically, the risk on/risk off pair has lately rebounded after being oversold on the daily RSI and after trading progressively down through the lower Keltner band. Three straight days of gains have now met resistance at the 100-day SMA at 81.79. This area also captures the long-term trendline support from the March 2020 low and the 21-day SMA. The daily RSI is back in neutral territory.

The aussie is currently the biggest G10 short, so position-squaring into the holiday period could continue, especially if there is more positive Omicron news. The midpoint of the August/October move sits at 82.07 and will act as further resistance. Otherwise, another bear leg sees support at 79.68 with the recent low at 78.78.