July 8, 2014
The Australian Dollar lost its strength last week following lower than expected retail sales (May Australian retail sales fell 0.5%) and the additional comments from The Reserve Bank of Australia (RBA) Governor, Glenn Stevens, regarding the strength of the Australian dollar. Economic growth in Australia is expected to be below standard for the rest of the year, dissolving some of the bullishness in the Australian dollar itself.
On Tuesday we saw the AUD/JPY going for another re-test of the 96.50 key resistance level with a near short term breakout, off the back of the RBA keeping rates on hold, but, following the RBA Governor Glenn Steven’s talk on Wednesday, we saw the pair retreat quickly towards recent support around the 95.25 level.
Short term outlook
In the short term we see the 95.25 as a significant support level that cannot be ignored and as such we will be monitoring for a break of these levels before we consider a more bearish point of view. Once the 95.25 level is broken, with a close below on the daily chart, we will reassess the momentum of the bears and re-evaluate from there.
With that in mind, let’s take a closer look at AUD/JPY through the 4 hour time frame (see chart below) to determine what the likely direction the pair will take over the next few trading sessions, as the AUD/JPY on the daily time frame is limited our ability to find a solid risk reward opportunity.
AUD/JPY remains traded below the Ichimoku Kinko Hyo, solidifying our view that the overall tone for the pair is still bearish. Since last week, it’s clear that the range for the pair has been very limited between 95.30 – 95.60. We could potentially see the pair break higher above 95.60 for a correction towards 95.90 before continuing to push lower.
Chart courtesy of Invast cTrader
Medium Term Outlook
Unfortunately on the medium term outlook, not much has changed and the pair remains traded below key level at 96.00 as well as within the Ichimoku cloud. Momentum as indicated by the Slow Stochastic does exhibit signs of exhaustion in the rally.
The short term outlook will determine if the market is ready for the overbought correction to commence this week. When the correction does happen we still think the pair will remain in a choppy, range bound market condition, as the range of the Ichimoku cloud is significant between 92.00 and 96.00.
It is highly likely we will not have a clear long term direction for the AUD/JPY for the next month or two. With that said, considering how overbought the slow stochastic is indicating, our bias remains to the downside and the longer AUD/JPY is traded close to 96.00 the higher the probability that the rejection from this level (should it happen) will be a strong downward push for the pair.
Chart courtesy of Invast cTrader
Short term strategy
The small range AUD/JPY presented last week was a blessing in disguise as it has provided us with not one but two short term opportunities for the week ahead.
Scenario #1
Price closes above 95.60 on the 4 hour time frame
Set Buy order at 95.60
Target at 95.90
Stop at 95.30
This set up will allow us to trade the pullback to the upside, although the risk to reward ratio is just 1:1
Chart courtesy of Invast cTrader
Scenario # 2
Price re-tests 95.90 – 96.00 and fail
Sell at 95.80
Stop at 96.25
Target at 95.00
This is the ideal scenario going forward as it provides us with a much better risk to reward ratio. The reason we include the first scenario is to maximise the small range the pair has offered for the past week.
Chart courtesy of Invast cTrader
Other Considerations
The NAB Business Confidence figures released today show much more faith in recovery of the Australian Economy, however the key event this week will be on Thursday when the Australian employment numbers are released. Last week’s comments from the RBA points to an inconsistency in the Australian labour market, and while the consensus is for a gain of 12.3K jobs last month in Australia, the unemployment rate is expected to increase to 5.9%. Should this eventuate it will likely send a mixed signal to traders, and judging by RBA’s concern for the labour market in Australia, we think the number might not be as positive as the consensus in the market is.
A weaker number will be sure to push the AUD/JPY lower than 95.00.
Contributing author:
Vito Henjoto
Technical Analyst
@vhenjoto