AUD/JPY – the FX Barometer of Risk - Is in No Mood for Risk

As my colleague David Scutt noted this morning, AUD/USD has resumed its role as a China proxy, and currently being dragged lower alongside iron ore, copper and sentiment on the Chinese economy in general. Add into the mix hawkish please from Japan’s government officials and the unwind of carry trades, AUD/JPY is on the ropes and desperately hoping the bell rings.

At the time of writing, AUD/JPY is amid its worst 10-day selloff since March 2022. Yes, back when markets were in turmoil as the pandemic began to take hold. The 10-day rate of change (ROC) is now -5.9%, which is less than half the -12.3% 10-day drop seen in March 2020, yet around the average significant drop since then (significant defined as a -3% then-day drop). The question now is how much more downside there is for the cross.

AUD/JPY 10-day rate of changes since the pandemic (over 3% declines)

18 March 2020: -12.3%
19 June 2020: -4.3%
25 September 2020: -4%
19 July 2021: -3.8%
19 August 2021: -3.5%
12 May 2022: -5.3%
26 September 2021: -5%
22 December 2021: -4.5%
AVERAGE: -5.3%

Yes, things are not great, but they are not ‘pandemic’ bad either. And as we’ve already seen a near 6% drop over the past 10 days, perhaps some mean reversion is due. Personally I do not want to be catching a falling knife and happy to step aside and fade into rallies at better prices. But with several key markets at or around support levels, I’m inclined to believe we’re at or near the end of this initial leg lower.

These may not be ideal levels to short AUD/JPY

Copper futures are holding above yesterday’s low and hovering near the March high. Iron ore futures are approaching the June low. AUD/USD appears in no such to break beneath the 200-day EMA, and the 200-day MA is less than a day’s typical trading range away. GBP/JPP is fast approaching the 200 handle and trend support on the daily. AUD/JPY is toying with the June low and 100-day EMA, but as of yet there is no form commitment. For what its worth, the CSI 300 is not extended its selloff today, and a 50% retracement level and June low are not too far lower for potential support.

If China sentiment has AUD/JPY on the ropes, then we’ll likely need a significant moral boost from Beijing to reverse this freight train. And right now that appears unlikely. Bears may want to fade into rallies for a better-timed entry.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.