Chart: Aussie Yen -- Risk On

Aussie Yen (i.e. AUDJPY) is one of those unique FX pairs that is particularly worth keeping track of because it acts as a sort of barometer market. I keep track of a lot of barometer-type markets: i.e. markets that have a particular fundamental/sentiment/flow drivers that reflect either dynamics in other markets or actual economic trends (for example iron ore is a good proxy for China demand, 10yr treasury yields reflect sentiment on the current economic outlook, and so-on). AUDJPY can basically be viewed as a macro/risk sentiment barometer. So what is it saying now?

Aussie Yen Chart: risk on risk off

This chart is from the latest Global Cross Asset Market Monitor (part of our institutional service).

Firstly, the reason why it can be considered this way (aside from the fact that the price typically does act in that way) is the Australian dollar has close sensitivity to commodities (and China) - you could almost call it a "developed EM currency". Meanwhile the JPY tends to act as a safe-haven currency, partly because of the belief that it is a safe haven currency, the fact that it has acted that way in the past, and mostly because Japanese investors hold a lot of offshore assets and tend to liquidate and head home in times of trouble (driving up demand for JPY).

As for what it's saying now, you can see that after turning up in late 2019, AUDJPY made a failed breakout against its 200-day moving average (the blue line in the chart). It then started to tick down, and with the corona-crash went full risk-off. But now, like many risk-assets (equities, commodities, credit), we've seen a clear rebound.

The thing to watch for here (or certainly what I am paying attention to) is whether this rebound sticks. Everyone is happy to be risk-on now that central banks are pumping in stimulus, and as a slightly better tone is sounded in the virus news flow, but what happens if the news flow turns or the likely grim data flow spooks traders? For me, the key thing to watch for is follow-through or lack thereof in key barometer markets like this, and in particular any signs of divergence e.g. if the S&P500 kept ticking higher but AUDJPY leveled-off and rolled over.

At a high level I remain bullish medium-term on growth assets, but am wary of likely bouts of "volatility aftershocks". And the epicenter of those volatility aftershocks is going to be in the key risk-sentiment barometer markets like AUDJPY. So keep a close eye on this one.

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Best regards,

Callum Thomas

Head of Research and founder at Topdown Charts Limited

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